Kossan Rubber Industries Bhd
(Aug 20, RM4.43)
Downgrade to neutral with a lower target price (TP) of RM4.03: Kossan Rubber Industries Bhd reported a flat revenue (+1.3% year-on-year [y-o-y]) and lower net profit (-4.5% y-o-y) in its second quarter ended June 30, 2018 (2QFY18). The weaker performance was mainly attributable to lower contribution from the glove division, which was offset by improved performance in the technical rubber products (TRP) division. Also, finance cost increased 57.9% or RM1.5 million y-o-y in 2QFY18 due to higher borrowings to fund its expansion plan. Net profit for the first half (1HFY18) accounted for 44% and 41% of our and consensus full-year estimates respectively. We deem the performance as within our expectations as we are expecting a stronger 2HFY18 driven by Plant 16, which was fully commissioned in August 2018.
We adjusted our earnings forecast downward by 1% and 3% for FY19 forecast (FY19F) and FY20F to account for the revision in capacity plan for Plants 18 and 19. Our TP was consequently lower to RM4.03 post share split (from RM4.05 previously). The share price has surged 25.3% since our upgrade on May 25, 2018, and given the minimal upside from our TP, we downgrade our call from “outperform” to “neutral”.
Despite the strong glove demand with stable average selling prices and higher volume sold (+8.9% y-o-y), the glove revenue and profit before tax (PBT) declined 2.4% and 11.9% y-o-y respectively. The weaker performance was mainly attributable to the lack of new capacity, time lag in cost pass-through arising from the increase in raw material costs (nitrile prices: +13.2% y-o-y), natural gas prices (+21.9%) and the unfavourable US dollar/ringgit exchange rate (-8.8% y-o-y). Note that the full commissioning of Plant 16 only started this month, hence there was no profit contribution from Plant 16 in 2QFY18.
TRP’s revenue and PBT jumped 32.1% and 190.4% y-o-y in 2QFY18 due to increased sales deliveries and sales of higher-margin products. The segment’s PBT margins grew to 18.2% in 2QFY18 from 8.3% in 2QFY17.
Plant 16, which has an annual production capacity of up to three billion pieces per annum (pa), was fully commissioned in August 2018. Construction works for Plants 17 (1.5 billion pieces), 18 (2.5 billion pieces) and 19 (three billion pieces) are underway and expected to be fully commissioned by 4Q 2018 (4Q18), 2Q19 and 4Q19 respectively. Upon completion, these three new plants would be capable of producing an additional seven billion pieces of gloves per annum (pa), bringing the group’s total installed capacity to 32 billion pieces of gloves pa by end-FY19.
Note that the capacity plan for Plants 18 and 19 was revised to 2.5 billion pieces and three billion pieces respectively (from the previous plan of three billion and 4.5 billion pieces). We adjusted our earnings forecast to account for the revision in capacity plan for Plants 18 and 19. Separately, the capacity expansion plan for the Bidor land, which is currently in the planning stage, was increased to 45 billion pieces (from 34 billion pieces). Pending further details on Bidor’s expansionary timeline, we have yet to impute any impact to our forecasts at this juncture. — PublicInvest Research, Aug 20