1QM17 PATAMI of RM46.5m (+4.3% QoQ; -9.2% YoY) came in within expectations at 22%/21% of our/market expectations fullyear net profit forecasts. We expect stronger performance in subsequent quarters underpin by a more conducive operating environment of less competitive pressure and low raw material cost. Reiterate MARKET PERFORM. As we roll-over our base valuation from FY17E to FY18E, our TP is raised from RM6.50 to RM6.60 based on an unchanged 19.5x PER.

Key Result Highlights

QoQ, 1Q17 revenue rose by 14% due largely to higher contribution from gloves division (+13.8%) on higher ASPs (+3.7%) and volume sales (+5.5%), which accounted for 86% of total revenue. The solid volume sales were achieved following a revamp work on one of the plants involving two production lines, s which have gradually resumed in end 4Q16 and utilisation rate is about 80%. However, PBT margin eroded to 11.3% from 12.4% in 4Q16 due to higher input latex cost. This brings 1Q17 net profit to RM46.5m (+4% QoQ). We expect margins to improve in subsequent quarters due to higher ASPs and lower raw material latex cost post wintering period. No dividend was declared in this quarter as expected.

YoY, 1Q17 revenue rose 21% due to higher ASPs (+9.5%) and volume sales (+7.5%) upon gradual ramp up in production lines, following the maintenance works. Recall, the plant revamp and maintenance work in two of its production plants since 2Q16. The revamp and upgrading works involved replacing a biomass system for natural gas and upgrading of twelve older production lines. Due to price competition and cost pressure from raw material prices and higher natural gas cost, 1Q17 pre-tax profit fell 14% as pre-tax margin fell 4.6ppts to 11.3% from 15.9% in 1Q16. This brings 1Q17 PATAMI to RM46.59m (-9.3% YoY) mitigated by a lower effective tax rate of 16.1% compared to 20.3% in 1Q16.

Outlook. Currently, the Group is operating with 22 billion pieces of glove with a production mix of nitrile and natural rubber glove at 72:28 and expansion program to increase glove capacity to cater increased demand from buyers for its patented low derma nitrile glove is on track. The construction of a new plant at Jalan Meru which commenced in May 2016 is on track and expected to be fully operational in July 2017. This plant is capable of producing up to 3.0bn pieces of nitrile glove per annum and will focus on the production of the patented low derma gloves. Currently, Kossan is at the final planning stage to build 2 new plants along Jalan Meru. The construction of these two new plants is expected to commence in 1H17 and is targeted to commence its commercial production in 2Q18 and 4Q18. These 2 new plants which equipped with high speed dipping technology and high degree of automation are capable of producing up to 4.5bn pieces of nitrile glove per annum.

Maintain Market Perform. We expect stronger performance in subsequent quarters underpin by the gradual ramp up in production and more conducive operating environment of less competitive pressure and low raw material cost. We roll-over our base valuation from FY17E to FY18E. By the same token, our TP is raised from RM6.50 to RM6.60 based on an unchanged 19.5x PER. Reiterate MARKET PERFORM

Source: Kenanga Research - 26 May 2017