FY19 PATAMI of RM225m (+13% YoY) came in within expectations at 99% each of our and consensus full-year forecasts. We are positive on Kossan (KRI’s) growth prospect going forward, underpinned by demand uptick with nascent signs of a strong volume growth rebound. With the past lacklustre demand far behind us, we see ramped-up re-stocking activities as the current outbreak of the Wuhan virus reinforced higher hygiene standards globally. TP is RM5.90. Maintain Outperform.

FY19 PATAMI of RM225m (+13% YoY) came in within expectations at 99% each of our and consensus full-year forecasts. No dividend was declared in this quarter but we are expecting a final 3.0 sen DPS most probably in April 2020, bringing total FY19 dividend to 6.0 sen which is within our expectation.

Key results’ highlights. QoQ, 4QFY19 revenue rose 9% due to higher contribution from rubber gloves (+10%) on higher volume sales (+8%) which more than offset lower ASP (-0.5%). 4QFY19 pre-tax profit rose 15% on the back of margin improvement due to better economies of scale. Pre-tax margin rose 0.7ppt to 12.5% from 11.8% in 3QFY19. This brings 4QFY19 net profit to RM61m (+24% QoQ) due to lower effective tax rate of 15% compared to 20% in 3QFY19.

YoY, FY19 revenue rose 4% due to higher contribution from the Gloves division (+4%), underpinned by higher volume sales (+8%) which more than offset lower ASP (-5%). The volume growth could have been higher in 9MFY19 if not for the following reasons: (i) revamp and upgrading works across the Group’s plants for efficiency improvements and energy savings in 2QFY19, and (ii) lower volume sales largely due to a labour shortage leading to Plant 18 suffering lower utilisation rate in 3QFY19. FY19 PBT margin improved to 12.6% compared to 11.6% in FY18 due to manufacturing efficiency and effective cost savings initiatives, including cost savings in heating and electricity. This brings FY19 PATAMI to RM225m (+13%) despite a higher effective tax rate of 19% compared to 18% in FY18.

Plant 17,18 and 19 to boost earnings over next two years. We understand that Plant 18 (2.5b pieces) was fully commissioned in Nov 2019. Plant 19 (3.0b pieces) currently has two lines commissioned and another two expected to be commissioned soon and on track for full operations by 1H 2020. Upon completion, these three new plants will bring the group’s total installed capacity to 32b (+28%) pieces of gloves per annum. Beyond plant 19, land clearing is underway in the Bidor plant, and the first plant is expected to start commercial operation somewhere in 2021, earlier than previously targeted in 2022.

Maintain OP. We maintain our FY19E/FY20E earnings forecasts. Our TP of RM5.90 is based on 28.5x FY20E EPS (+1.5SD above 5-year historical forward mean). We like Kossan for it is trading at an unwarranted 25% discount to peers’ PER average despite having the highest net profit growth of 18% compared to peers’ average at 7%. This quarter’s earnings performance is paving the way for another record earnings year in 2020. Note that the stock traded at +2.0SD in previous peak earnings cycle. Reiterate Outperform.

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

Source: Kenanga Research - 24 Feb 2020