Kossan  continues  to  benefit  from  its  earnings  profile  which  exhibits both  resilience and  growth,  amidst  the  uncertain  market  environment. We  maintain  our  BUY  recommendation  with  a  revised  TP  of  MYR6.01(16%  upside,  17x  FY16F  P/E),  from  MYR5.12  previously.  Kossan  also benefits from subdued cost factors and a stronger USD.

Attractive earnings profile.  Amidst the uncertain market environment, the rubber  glove sector offers exposure  through  a safe-haven  earnings profile  which  exhibits  both  resilience,  due  to  the  association  with  the healthcare sector  and  growth characteristics  on the back of  aggressive capacity-led  earnings  expansion.  Kossan  is  expected  to  increase capacity at an annual growth of approximately 20.0% (from 18bn to 22bn pieces)  over  the next  two  years  which could result in a  2-year  earnings CAGR of approximately 20.2%.

Macro-economic  themes.  In  addition  to  the  subdued  raw  material prices  (Figure  1),  Malaysia’s  revised  budget  postponed  the  gas  and electricity tariff hikes for  2015.  Combined, both gas and electricity make up  roughly  15%  of  Kossan’s  operating  costs.  We  have  revised  our USDMYR  exchange  rate  assumption  for  FY15  to  MYR3.50  from MYR3.30.  Our  revised  assumptions  for  energy  and  FX  led  to  a  2.6% upward revision in FY15F earnings to MYR197.5m and a slight decrease in FY16F earnings to MYR226m, from MYR236.1m previously, based on our more conservative production capacity assumptions.

Risks. Heightened competition could lead to lower ASP and margins.

Maintaining  BUY.  We believe that Kossan, much like the other players in the  rubber glove sector,  continues  to benefit  from its  earnings profile that  exhibits  both  resilience  and  growth  amidst  the  uncertain  market environment.  Maintaining an unchanged valuation band, we role forward our  revised  earnings  estimate  to  FY16F  to  reflect  forward  growth expectations.  Maintain  BUY  with  a  TP  of  MYR6.01  (16%  upside,  17x FY16F P/E) from MYR5.12 previously.  This is a discount to Hartalega’s 21x  multiple, which we think justified  given Hartalega’s leadership in  thenitrile glove segment and superior profit margins.

Macro-economic themes
Prices of raw materials, nitrile and latex remain  subdued. The weaker demand and stronger  supply  situation  in  the  rubber  market  is  expected to  persist,  thus  keeping prices  of  natural  latex  low.  The  current  weakness  in  prices  of  oil,  which  nitrile  is derived from, is expected to keep prices of the nitrile favourable as well.

The  stronger  USD  relative  to  MYR  is  a  boon  to  Kossan  as  revenues  will  be proportionately  more  sensitive  to  the  USD  relative  to costs  as  >90%  of  revenue  is denominated  in  USD  while  ~30%  of  cost  is  denominated  in  MYR.  The  USD  has strengthened 7.3% against the MYR since Dec 14.

Source: RHB