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Monday, August 20, 2018

Kossan Rubber Industries - Left Much to be Desired

Author: HLInvest | Publish date: Mon, 20 Aug 2018, 10:18 AM

Kossan’s 1H18 core PATAMI of RM77.4m (-2.0% QoQ, -4.1% YoY) was below ours and street’s expectations due to the lag in ASP revision and a weaker USD/MYR YTD. Our FY18-20 forecasts are adjusted downwards by -9%/-3%/-3% to account for the lag in ASP revision amidst the stronger velocity in cost drivers YTD (butadiene c. +57.9%) and a more conservative outlook for Plant 16’s contributions to FY18’s numbers. Maintain SELL rating with a lower TP of RM3.72 (20.3x FY19 earnings).

Below expectations. 1H18 core PATAMI of RM77.4m (-4.1% YoY) came in below expectation at 36.7% and 36.1% of ours and consensus full year estimates. The results were below mainly due to the lag in passing on the higher energy costs (natural gas, +21.9% YoY) amidst a less favourable USD/MYR environment (-10.3% YoY).

QoQ. Revenue grew 2.6% to RM496.8m (1Q18: RM484.2m) on higher sales volume (+2.8% QoQ) and better ASP (+3.4%). EBITDA improved by 1.6% to RM75.2m (1Q18: RM74m) whilst EBITDA margins narrowed to 15.1% from 15.3% due to the time lag in the cost pass through of the increase in NBR prices (+10.1% QoQ) from the Gloves segment partially offset by better performance from the TRP segment QoQ (PBT +60% to RM8.1m). Core PATAMI declined by 4.4% to RM37.8m.

YoY. Revenue of RM496.8m (2Q17: RM490.5m) came in flattish (+1.3% YoY) despite volume growth (+8.9% YoY) due to flattish ASP (+1%-2%) and a weaker USD/MYR YoY (-8.8%). EBITDA margin softened by 0.5ppts to 15.1ppts (2Q17 15.6%) on the back of higher NBR prices (+13.2%) and natural gas (+21.9%) YoY. Core PATAMI declined by 2.0% as a result.

YTD. Revenue eased by 1% to RM981.0m (from RM990.5m) whilst EBITDA performance mirrored the topline easing 2% to RM149.2m (from RM152.3m) as performance from the gloves division softened (revenue: -2.8%; PBT: -8.6% YoY) amidst the same above mentioned factors, offset by stronger contributions from the TRP division (revenue: +7.7%; PBT: 60.9%).

Outlook. We understand that Plant 16 (+3bn pieces capacity, c. +13.6%) was only fully commissioned in August (we had initially expected full commissioning and assumed full ramp up in production by July). Thus we turn more cautious on the velocity of the ramp up in operations in Plant 16 and her maiden contributions for the remainder of FY18. Furthermore, we are of the opinion that prices for Nitrile gloves will remain sticky in 2H18 as the group would’ve only passed on the higher prices of natural gas in the coming quarters, amidst the background of higher butadiene prices YTD (+57.9%), offset by the better USD outlook in 2H18. We remain conservative on the timing of the contributions from plant 17 and 18 (4.0bn pieces p.a. previously 4.5bn pieces) with the latest guidance being 4Q18 for plant 17 and 2Q19 for plant 18.

Forecast. We revise our FY18-20 earnings downwards by 9%-3% to account for the lag in ASP revision amidst the stronger velocity in cost drivers YTD (butadiene c. +57.9%) and a more conservative outlook for Plant 16’s contributions to FY18’s numbers.

Maintain SELL, TP: RM3.72. Post earnings revision our TP decreases to RM3.72

(from RM3.84). Our TP is a function of FY19 EPS pegged to a PE multiple of 20.3x (0.5SD above the stocks 5-year historical mean).

Source: Hong Leong Investment Bank Research - 20 Aug 2018

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