We keep our BUY recommendation and  TP  of  MYR5.12 (12.8% upside, 17x  FY15F  P/E).  9M14  earnings  came  in  weaker  than  expected  due to lower contributions from all divisions, but we see  a  bright outlook for FY15  when  its  new  lines  commence  operations.  Kossan  declared  a dividend  of  3.5 sen  in  the quarter under review. We  remain positive on the company’s future growth prospects.

Slower growth.  Kossan  Rubber Industries’ (Kossan) 9M14 net  profit  of MYR105.8m  (+3.7%  YoY)  came  in  weaker  than  our  and  consensus expectations, at 63% and 65% of the respective full-year forecasts. This was  attributed  to  lower-than-expected  sales  (-2%  YoY)  from  the technical  rubber  division  due  to  lower  exports  of  industrial  and automotive parts, although the  sales of  infrastructure  products together with  marine  and  dock  fenders  remained  strong.  Lower  average  selling prices  (ASPs)  in  the  gloves  division  due  to  lower  raw  material  pricesoffset higher  sales volume (+5.5% YoY for 3Q14).  As for  its clean-room division,  higher  operating  expenses  incurred  from  the  expansion  of  its clean-room  facilities  in  China  coupled  with  higher  staff  costs  led  to  a decline in earnings contribution. 

Outlook.  We  learnt  that  Kossan  is  currently  ramping  up its  production volume – Plant 1 is currently running at full capacity, while Plants 2 and 3 are expected to commence commercial production in Nov 2014 and Jan 2015  respectively.  Coupled  with  its  cost-control  measures  to  improve production  efficiency,  we  remain  positive  on  the  company’s  future earnings prospects. The technical rubber products division is expected to pick  up  when  supply  to  the  mass  rapid  transit  (MRT)  projects  starts,while  the  clean-room  division  is  set  to  improve  since  the  expansion investment has been completed.

Maintain  BUY.  We  trim  our  FY14  earnings  forecast  by  6%  as  full contribution from  its new plants has yet to come in, and keep our FY15 forecast unchanged. Maintain BUY with  an  unchanged TP  of  MYR5.12, based on a 17x FY15F P/E, at a  discount to Hartalega Holdings’ (HART MK, BUY, TP: MYR7.50) 21x. However, we think this is justifiable noting that Hartalega fetches a better net profit margin of  20% vs Kossan’s 11-12%,  given  the  former’s  superior  operating  efficiency  and  greater emphasis on nitrile glove production.   

Source: RHB