Investment Highlights

• 3QFY17 earnings below expectations at RM45.7m

• Revenue flat qoq due to absence in new capacity

• Earnings to improve with new capacity in 4QFY17

• FY17F earnings forecasts reduced by -10%

• Maintain NEUTRAL with unchanged TP of RM7.57

Below expectations. Kossan’s 3QFY17 earnings came in at RM45.7m. This brings its 9MFY17 earnings to RM137.7m which is below our and consensus’ full-year earnings expectation at 67% and 63% of full year forecasts respectively. Against last year, revenue and earnings climbed by +18.1% and +34.3% respectively. However, on a quarterly sequential basis, it recorded a marginal decline in revenue by -0.3% and +0.4% in earnings respectively. In addition, an interim dividend of 5.0sen was also declared for the quarter under review.

Revenue flat qoq due to absence in new capacity. In 3QFY17, the increase in revenue year-over-year was mainly attributable to: (i) increase in sales volume (+7.5%yoy) and; (ii) favourable exchange rate (RM4.26 per USD in 3QFY17 vs RM4.05 per USD in 3QFY16). During the quarter, its gloves division recorded a revenue increase of +19.7%yoy. However, on a quarterly sequential basis, revenue was flat due to absence in new capacity during the 1HFY17. In addition, Kossan’s revenue was also affected due to lower contribution from technical rubber products segment due to: (i) lower contribution from infrastructure products as a result of completion of certain contracts which are on project-to-project basis as well as; (ii) sharp increase in raw materials price. That said, revenue and earnings during the quarter were cushioned by the increase in average selling prices (ASP) for its gloves which grew by an average of +%3.0yoy.

Earnings to improve with new capacity. Management disclosed that Kossan is expecting Plant 16’s +3.0b new capacity to be fullycommissioned this coming December 2017 instead of October 2017. So far, the plant has completed eight lines in October 2017 which are currently undergoing trial-runs. The remaining six lines will be commissioned by December. Meanwhile the other two plants to be built along Jalan Meru (Plant 17 and 18) are now at their respective earthworks stage. Construction is expected to begin in the 2HFY17 and is expected to be operational in 2QFY18 and 4QFY18 respectively. These two new plants will add +4.5b of new capacity to Kossan’s production going forward.

Source: MIDF Research - 24 Nov 2017