INVESTMENT HIGHLIGHTS

• 4QFY18 earnings recovery led to full year FY19 earnings of RM 200.8m, in-line with our and consensus expectations

• Higher production capacity and lower effective tax rate contributed to the earnings improvement

• Plant 17 to start contributing meaningfully in 1QFY19, with another two new plants coming on stream in this year

• Newer plants to command better profit margins

• Upgrade to BUY with a revised TP of RM4.62

Within expectations. Kossan Rubber Industries Bhd’s (Kossan) 4QFY18 earnings rose by +29.6%yoy to RM59.5m. This brings its FY18 earnings to RM200.8m which is within ours and consensus’ full-year earnings expectation at 97.5% and 97.8% of full year FY18 earnings forecasts respectively. Comparing to FY17, earnings was up by +9.3%yoy thanks to a stronger 2HFY18 performance resulting from the commencement of Plant 16 (August 2018) and Plant 17 (November 2018).

Glove division drives improvement in earnings. The commendable FY18 earnings was mainly attributable to the improved performance of Kossan’s glove division. The division’s FY18 revenue and profit before tax (PBT) increased by +9.3%yoy and +4.8%yoy respectively. This was mainly caused by: (i) higher average selling price (+6.1%yoy); and (ii) higher sales volume (+9.7%yoy) resulting from the new capacity contributed by the commissioning of Plant 16 and Plant 17 (+4.5b pieces); and iii) effective tax rate of 17.7% (vs FY17:19.2%). However, division performance was partially impacted by: (i) higher natural gas price (+22.82%yoy); (ii) higher nitrile price (+9.27%yoy); and (iii) less favourable USD/MYR exchange rate (- 6.2%yoy).

Capacity expansion on track. Kossan’s Plant 17 has been fullycommissioned since November 2018. Meanwhile, the two other plants (Plant 18 and 19) are now currently under construction and expected to be fully commissioned by 2QFY19 and 4QFY19 respectively. These two new plants will add additional 5.5b pieces of new production capacity in 2019. This will increase Kossan’s existing glove production capacity from 26.5b pieces to 32.0b pieces (+20.8%). Hence, we believe that these plants will contribute strongly to Kossan’s earnings going forward driven by the robust demand for glove product.

Source: MIDF Research - 19 Feb 2019