KEY INVESTMENT HIGHLIGHTS

• 4QFY19 earnings came in at RM61.0m (+2.5%yoy), in line with our expectation

• 4QFY19 revenue dropped marginally by -1.9%yoy as average selling price contracted further

• The rise in quarterly earnings rose was driven by a lower raw material cost and higher sales volume

• We do not expect a significant spike in sales volume resulting from the outbreak of Covid-19 in the near term

• Downgrade to NEUTRAL with an unchanged TP of RM4.64

Met expectations. Kossan’s 4QFY19 earnings came in at RM61.0m which brings its full year FY19 earnings to RM224.8m (+12.5%yoy). This met our and consensus’ full-year earnings expectation at 97.2% and 98.7% of full year forecasts respectively. Comparing to the previous year corresponding quarter, 4QFY19 revenue declined marginally by - 1.9%yoy. However, 4QFY19 earnings staged a slight improvement of +2.5%yoy thanks to higher sales volume.

Sales revenue dropped due to the lower ASP. Kossan's Plant 18 which has a production capacity of 2.5b pieces of glove was fully commissioned in the end of November 2019. Consequently, sales volume was up by +3.8%yoy. However, the decline in average selling price (ASP) by about -6.0%yoy, brought about by the heightened competition, had resulted in a lower group revenue.

However, earnings improved due to better profit margin. During the quarter, the price of Nitrile Butadiene Rubber (NBR) dropped by about -12.0%yoy. This had benefited the group as its nitrile to natural rubber split currently stands at about 79:21. The lower NBR cost had mitigated the increase in natural gas costs (+5.8%yoy), start-up costs from the recently completed plants, as well as higher foreign worker recruitment costs. Accordingly, 4QFY19 profit margin improved by +0.4ppts to at 10.5% (i.e 4QFY18: 10.1%).

Earnings forecast. We maintain our forecasts as our earnings estimates are still within expectation. Key risks to our earnings forecasts would be: (i) slowdown in demand for glove product; (ii) sudden jump in raw materials prices i.e. nitrile and latex and; (ii) delay in expansion plans.

Target Price. We maintain our target price at RM4.64 per share. The target price is derived via pegging our FY20F EPS of 21.1sen to PER of 22.0x which is its two-year historical average.

Source: MIDF Research - 24 Feb 2020