FY18 PATAMI of RM200.8m (+10% YoY) came in within expectations at 97%/98% of our/consensus full-year forecasts. We are positive of its earnings growth ahead since Plant 16, 17, 18 and 19 are expected to be fully taken up. Volume sales from new capacity coupled with better efficiency from new plants are expected to offset any ASPs pressure. TP is RM4.95 based on 25.5x FY19E EPS. Reiterate OP.

FY18 PATAMI of RM200.8m (+10% YoY) came in within expectations at 97%/98% of our/consensus full-year forecasts. No dividend was declared as expected. However, we expect Kossan to declare a final DPS of 3 sen somewhere in 2Q 2019 bringing our FY18 DPS to 6.0 sen which is inline with our expectation.

Key result highlights. QoQ, 4Q18 revenue rose 2.7% due to higher contribution from rubber gloves (+2.7%) underpinned by higher volume sales (+2.5%) that more than offset lower ASPs (-1.9%) and further supported by new capacity from Plant 16 (full quarter contribution) which commenced operations in Aug 2018, albeit on a higher base, which accounted for 88% of total revenue. Overall, PBT margin reduced by 0.2ppt to 12.1% in 4Q18 compared to 12.3% in 3Q18 due to higher energy cost. This brings 4Q18 net profit to RM59.5m (+10% QoQ) due to a lower effective tax rate of 14.5% compared to 22.2% in 3Q18.

YoY, FY18 revenue rose 10% due to higher contribution from the Gloves division (+5%) underpinned by higher volume sales (+9.7%) and ASP (+6.1%) which was boosted by the improved performance in the TRP division compared to FY17. The TRP division’s revenue rose 14% in FY18, while PBT soared 76% attributable to increased sales deliveries and sales of higher margin products. This brings FY18 PATAMI to RM200.8m (+10% YoY) boosted by a lower effective tax rate of 17.7% compared to 19.3% in FY17.

Outlook. We are positive of earnings growth ahead since Plant 16,17,18 and 19 are expected to be fully taken up. We expect volume sales from new capacity coupled with better efficiency from new plants to offset any ASPs pressure. Looking ahead, Plant 16 is expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on-track, with expected full commissioning by 2Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per year by end FY2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects the expansion, which is currently in the planning stage, to commence in 2020 and take eight years to complete.

Maintain Outperform. TP is RM4.95 based on 25.5x FY19E EPS (+1.0SD above 5-year historical forward mean). We like Kossan for its stronger YoY earnings growth in subsequent quarters ahead compared to peers.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 19 Feb 2019