We believe that Kossan is unjustly punished relative to its peers in the recent sector selldown. Given its robust 3-year EPS CAGR of 17%, we opine that the stock would be an attractive opportunity amidst subdued Malaysian GDP growth expectations this year. Given that Kossan’s fundamentals remain intact, the recent price weakness represents an interesting entry point. As such, we upgrade the stock to BUY (from Neutral) with a revised MYR8.27 TP (from MYR9.35, 23% upside).

Robust earnings prospects. Kossan Rubber Industries’ (Kossan) earnings growth would be driven by aggressive capacity expansion plans where itintends to add about 20bn glove capacity (four phases) over the next four yearsto bring total capacity to 44bn pa, against the backdrop of strong global glove demand. Consequently, we expect a 3-year EPS CAGR of 17%, which would stand out amidst subdued Malaysian GDP growth expectations this year. Margin sustainability. Management intends to improve its product mix (highermargin surgical and clean-room gloves) as well as enhance operating efficiency to ensure margin resilience in the face of rising labour and utilities (government subsidy rationalisation) cost pressures.

Earnings forecast & risk. We revise our FY16F-18F earnings by -9%/+5% after updating our capacity schedule assumptions. The risk to our recommendation would be negative ASP pressure should industry competition heighten amid increased glove supplies.

Upgrade to BUY. FY15 earnings met target at 98%/99% of our/consensus estimates. We believe current price levels (Figure 4) represent an interesting entry point as Kossan’s fundamental story remains intact. Upgrade to BUY (from Neutral) with a revised DCF-based TP of MYR8.27 (CoE: 8.3%, TG: 2%), implying 23x FY16F P/E. Kossan is currently trading at 18.8x FY16F P/E, at 1SD of its historical 5-year trading band (Figure 3), where the stock has traded above this valuation level for the past nine months.