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Monday, May 27, 2019

Kossan Rubber Industries - Solid 1Q19, Growth Powering Ahead

1Q19 PATAMI of RM58.7m (-1.3% QoQ, +31.9% YoY) came in within expectations at 24%/25% of our/consensus fullyear forecasts. Subsequent earnings growth to be driven by Plant 16, 17 and 18. Volume sales from new capacity coupled with better efficiency from new plants are expected to offset any ASPs pressure. We roll forward our valuation from FY19E to FY20E. TP is raised from RM4.95 to RM5.25 based on 25.5x FY20E EPS. Reiterate OP.

1Q19 PATAMI of RM58.7m (-1.3% QoQ, +31.9% YoY) came in within expectations at 24%/25% of our/consensus full-year forecasts. No dividend was declared in this quarter as expected.

Key result highlights. QoQ, 1Q19 revenue fell 4.7% due to lower contribution from rubber gloves (-4.3%) on lower ASP (-7%) but negated by higher volume sales (+4.7%). The higher volume sales reflected the full-quarter contribution of new capacity from Plant 16 and 17. The Technical Rubber Product (TRP) division revenue decreased 7.4%, while PBT fell 19.5% due to lower deliveries and increase in raw material price (+8.2%). Overall, PBT margin expanded by 1.3ppt to 13.4% in 1Q19 compared to 12.1% in 4Q18 due to improved operational efficiencies from the new plants. This brings 1Q19 net profit to RM58.7m (-1.3% QoQ), dragged down by higher effective tax rate of 20.8% compared to 14.5% in 4Q18.

YoY, 1Q19 revenue rose 16% due to higher contribution from the Gloves division (+18.5%), underpinned by higher volume sales (+18.8%) which more than offset lower ASP (-3-5%). The TRP division’s revenue rose 7% while PBT soared 35% attributable to increased sales deliveries and sales of higher margin products. This brings 1Q19 PATAMI to RM58.7m (+31.9%) despite a higher effective tax rate of 20.8% compared to 14.6% in 1Q18.

Outlook. We are positive of earnings growth ahead since Plant 16,17,18 and 19 are expected to be fully taken up. We expect volume sales from new capacity coupled with better efficiency from new plants to offset any ASPs pressure. Looking ahead, Plant 16 and 17 are expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on track, with expected full commissioning by 3Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per year by end of FY2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects the expansion, which is currently in the planning stage, to commence in 2020.

Maintain OUTPERFORM. We roll forward our valuation from FY19E to FY20E. TP is raised from RM4.95 to RM5.25 based on 25.5x FY20E EPS (+1.0SD above 5-year historical forward mean). We like Kossan because it is trading at an unwarranted 28% discount to peers’ PER average considering that its net profit growth is the highest at 23.7% compared to peers average at 12%.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 27 May 2019

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