Period

4Q15/FY15 Actual vs. Expectation s

FY15 net profit of RM203.3m (+40% YoY) came in within expectations, at 102% and 101% of our and consensus full-year forecasts, respectively.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

QoQ, 4Q15 revenue fell marginally by 0.6% to RM439m due largely to lower contribution from gloves division, which accounted for more than 86% of total revenue. Specifically, gloves revenue fell 2% despite higher volume growth (12% QoQ) on the back of 82% utilisation rate which more than offset lower ASP. Pre-tax margin improved to 17.9% from 16% in 3Q15 due to better product mix skewed towards nitrile. The product mix of nitrile and natural rubber for the current quarter stood at 70:30 (versus 68:32 in 3Q15). This brings 4Q15 net profit to RM55.2m (flat QoQ) dragged down by higher effective tax rate of 28% compared to 21% in 3Q15.

YoY, FY15 revenue rose 26% to RM1.7b thanks to higher glove sales volume (+26%) and higher RM ASPs due to the weaker MYR against USD. Higher volume sales, better product mix (the product mix of nitrile and natural rubber for FY15 was 70:30 (versus 57:43 in FY14) and improved operational efficiency led to FY15 EBITDA margin of 21% compared to 19% in FY14. This brings FY15 PATAMI to RM203m (+40% YoY).

Outlook

Looking ahead, growth in subsequent quarters is to be driven by Plant 2 and 3 with 4b pieces capacity per annum, expected to be running at full capacity. We understand that clients have been found for the new capacity. This brings the three new plants installed capacity to 22b from 16b per pieces of gloves per annum.

Meantime, another ongoing project is also expected to complete and contribute in 2HFY17. Kossan has started construction of one nitrile glove plant located in Jalan Meru near to its existing plants and this plant once completed, will add another 3.0 billion pieces of glove to the existing. With this expansion program gradually completing and contributing within financial year 2017.

Change to Forecasts

No changes to our earnings forecasts.

Rating & Valuation

The share price has retreated 27% and the valuations appear compelling. As such we upgrade our Market Perform rating to Outperform. Our target price is RM9.11 based on unchanged 22x FY17E EPS.

We like Kossan for: (i) its net profit growth of 17% and 12% in FY16E and FY17E, respectively, and (ii) the unprecedented earnings growth over the next two years underpinned by rapid capacity expansion.

Risks

Delay in commissioning of new production lines.

Source: Kenanga Research - 24 Feb 2016