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Tuesday, April 10, 2018

CIMB Research downgrades Kossan to Hold, lower target price due to delay

Tuesday, 10 Apr 20188:26 AM MYT

KUALA LUMPUR: CIMB Equities Research has downgraded Kossan Rubber Industries
from Hold to Add with a lower 12-month target price of RM8.10 from the earlier RM9.57 on continuous delays to its plan to expand capacity for its glove manufacturing. The last traded price was RM7.47.

It said on Tuesday the downgrade was in tandem with its cut in the earnings per share (EPS).

“We are also lowering our target P/E multiple to 19.6 times CY19 P/E (in line with its five-year average) from 22.4 times previously.

“This is mainly due to our concerns on continuous delays to its capacity expansion plans and weaker three-year compounded annual growth rate (CAGR) of 18.3% vs. its peers’ average of 25.8%. Upside risk: faster-than-expected commissioning of its new lines. Downside risk: sharp weakening of US$/RM,” it said.

CIMB Research recently spoke to Kossan about the progress of its new F16 plant (three billion pieces per annum).

As at March 18, all eight lines in the plant have already been installed but have yet to begin full commercial production.

This is mainly due to teething issues during the trial runs, leading to a longer-than-expected period required for line tests.

“Hence, we are revising our expectations of full commercial production of the plant to only begin by mid-2Q18, from our earlier projection of beginning of 1Q18

“Kossan is now taking a more conservative stance on the delivery of its other two new plants, F17 and F18 (4.5 billion pieces per annum).

“Currently, construction works are ongoing and will only be completed by end-2018. We now expect gradual commercial production to begin by beginning of 2Q19, a four-month delay from our earlier forecast,” it said.

CIMB Research said both plants will increase Kossan’s total production capacity by 18.9% to 29.5 billion per annum and will be producing nitrile butadiene (NBR) gloves, bringing its total product mix to its target of 80 NBR: 20 NR.

The research house said that since Kossan has not added any new capacity since December 2015, it has not been able to benefit from the recent surge in demand for gloves (due to lower supply of vinyl gloves from China).

As a result, the group’s FY17 volume growth of 6% on-year has been weaker than its peers (Top Glove and Hartalega) given that production growth mainly stemmed from refurbishment works on its older lines.

“Hence, we believe the commencement of full commercial production of Plant 16 is essential to drive earnings growth in FY18F.

“For the upcoming 1Q18F results, we expect Kossan to record a flattish net profit on a qoq basis. Our view is based on a minimal increase in its production volumes in 1Q18F, while the recent weakness in US$/RM should be mitigated by a decline in natural latex prices.

“Nevertheless, we are lowering our FY18-20F EPS estimates by 1.9-6.0% to take into account the delays in its expansion plans. Note that any further delays in the ramp-up of its new plants will act as downside risks to our forecasts,” it said.


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