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Thursday, November 24, 2016

Kossan kept at Hold by CIMB Research

Wednesday, 23 November 2016 | MYT 8:41 AM

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call on Kossan Rubber Industries due to the weaker earnings caused by stiffer pricing competition, higher operating costs and lower production output due to ongoing revamp.

The research house said on Wednesday the glove maker's et profit of RM129mil for the nine months ended Sept 30, 2016 was below expectations, at 60% of its FY16 estimates.

“The 3QFY16 results were underwhelming -- revenue declined 6.3% on-year and net profit, 38.3% on-year. A five sen a share dividend was declared, within expectations,” it said.

As for FY17, CIMB Research says Kossan will see the resumption of production from plants currently ongoing revamp while a new plant started in July.

“Maintain Hold, with higher target price of RM7.55 after rollover to CY18F.

“As we roll over our valuation to end-CY17F, we also lift our target P/E multiple to 19 times (three-year historical mean) from 17.5 times given the improving external environment from stronger a US$/Ringgit rate.

“FY16F is likely to be disappointing for Kossan. We advocate that investors look forward to FY17 for a resumption in its growth trajectory. We would turn more positive on the stock if sales volume exceed expectations or if Ringgit weakens further. Key downside risk to our Hold rating is a sharp strengthening of the ringgit,” it said.

CIMB Research pointed out that despite revenue rising 2.8% on-year, 9M16 net profit faltered 13.0% on-year to RM129mil.

This was due to weaker profitability in the glove division stemming from: i) intensified pricing pressure, ii) overall higher systemic costs (higher labour and natural gas costs, minimum wage), and iii) capacity constraint issues from ongoing revamp.

“We gather that the revamp works on two plants since early-2Q16 led to lower utilisation rates, further abating its profitability. Consequently, EBITDA margins declined to 17.9% (-2.6 percentage points).

“3QFY16 was a letdown. Kossan faced pricing pressure and increase in operating costs, as well as a substantial capacity constraint issue (loss of c.6-8% of total capacity) amid a persistently competitive environment.

“Glove production volume declined due to revamp works at two of its plants since 2Q16 and upgrading works on another 12 production lines. These weighed significantly on its margin, which declined by 6.1 percentage points to 14.3% during the quarter.

“We expect a quarter-on-quarter improvement in earnings in 4Q16 as production lines undergoing upgrading works are gradually commissioned. The two revamped plants are slated for full commercial production by end-2016,” it said.

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