INVESTMENT HIGHLIGHTS

• 4QFY17 earnings within expectations at RM45.9m

• Higher revenue contribution across business segments

• New capacity expansion on track

• Proposed share split of 1-to-2 of Kossan shares

• FY18F earnings forecasts increased by +6.6%

• Maintain NEUTRAL with a revised TP of RM8.78

Within expectations. Kossan’s 4QFY17 earnings came in at RM45.9m. This brings its FY17 earnings to RM183.6m which is within our but below consensus’ full-year earnings expectation at 99.9% and 95% of full year forecasts respectively. Against last year, revenue and earnings increased by +9.0% and +2.9% respectively. However, on a quarterly sequential basis, it recorded a marginal decline in revenue by -2.3% and +0.5% in earnings respectively. No dividend was declared for the quarter under review.

Higher revenue contribution across business segments. In 4QFY17, the increase in revenue year-over-year was mainly attributable to: (i) increase in sales volume (5.0%yoy) and; (ii) higher revenue contribution across its business segments. During the quarter, its gloves division recorded a revenue increase of +8.77%yoy. Meanwhile, its technical rubber products (TRP) as well as Cleanroom division also recorded a +10.3% and +28.7% increase in revenue respectively vs 4Q16. In addition, efficient manufacturing processes, increased automation as well as; higher sales deliveries were among the factors contributing to the higher revenue. Furthermore, revenue and earnings during the quarter were also assisted by the increase in average selling prices (ASP) for its gloves which grew by an average of +%3.0yoy.

New capacity expansion on track. Management disclosed that Kossan’s Plant 16’s that will contribute +3.0b new capacity has been fully-commissioned last December 2017. Plant 16 will begin to contribute to Kossan’s revenue in FY18. Meanwhile, the other two plants to be built along Jalan Meru (Plant 17 and 18) are now currently under construction and are expected to be completed by 2018 and will start contributing to Kossan’s revenue thereafter. These two new plants will add +4.5b of new capacity to Kossan’s production going forward.

Proposed share split of 1-to-2 Kossan shares. Kossan has also announced a proposed 1-for-2 subdivision of shares yesterday. The share division which is slated to be completed by end of September 2018, is expected to boost the trading liquidity of its shares as well as encourage participation from new investors in the company’s growth. Post the subdivision, its share base will increase to 1,278.9m from the current 639.5m. We are neutral on this announcement as despite the increase in number of shares allocated to investors, there will be dilution in earnings per share (EPS) from the current FY18F EPS of 36.6sen to 18.3sen. Subsequently, our TP will be revised to RM4.39 to reflect the enlarged share based once the exercise is completed in 3Q18.

Earnings forecast. Post earnings announcement, we are revising our FY18F earnings forecasts up by +6.6% as we increase our ASP assumption due to the increase in production cost such as: natural gas. Key risks to our earnings would most likely be: (i) increasing competition which may squeeze margins and ASP; (ii) sudden jump in raw materials prices i.e latex and nitrile and; (iii) demand and supply mismatch.

Maintain NEUTRAL with a revised Target Price (TP) of RM8.78. Post earnings announcement and adjustment, we are maintaining our NEUTRAL recommendation on Kossan with a revised TP of RM8.78 per share. Our TP is derived via pegging our FY18F EPS of 36.6sen to a revised PER18 of 24x, representing the average PER across three years. We believe that despite the high demand for gloves, earnings growth for this year will continue to be constrained as currently Kossan is already operating at full capacity with its latest Plant 16’s capacity being sold out and new capacity of +4.5b will only come in by end-2018. In addition, as its share price has recently surge to current level last seen since October 2016, we are expecting limited upside to its share price at this juncture.

Source: MIDF Research - 23 Feb 2018