This article first appeared in The Edge Financial Daily on May 28, 2019

Kossan Rubber Industries Bhd
(May 27, RM3.90)
Upgrade to trading buy with a higher target price (TP) of RM4.30: Kossan Rubber Industries Bhd reported a better set of results for the first quarter of financial year 2019 (1QFY19), with a 31.9% year-on-year (y-o-y) increase in net profit to RM58.7 million.

The results were broadly in line with our and the street’s estimates, at 26.7% and 24.9% respectively. In our universe of coverage, only Kossan has managed to deliver a satisfactory and positive quarterly performance. All segments of Kossan posted stronger earnings in 1QFY19. The technical rubber products division’s profit before tax (PBT) was up 35% y-o-y, glove segment’s PBT up 43% y-o-y and cleanroom segment’s PBT up 38% y-o-y.

Rolling forward our valuation of FY20 forecast (FY20F), we raise our TP to RM4.30, based on an unchanged price-earnings ratio of 21 times. Given an upside potential of 13%, we upgrade Kossan to “trading buy” instead of an outright buy as we are not expecting its Bidor integrated plant to generate meaningful earnings in the near term, perhaps only in FY22F.

Kossan’s glove division saw a 7.1% y-o-y increase in its revenue, to RM497 million this quarter. The growth was supported by higher glove sales (+18.8% y-o-y) and increased production capacity from Plant 17 (+1.5 billion pieces per annum) as it was fully commissioned in November 2018. Despite the higher revenue, average selling price (ASP) fell around 3% to 5% y-o-y and we attribute this to lower raw material prices and foreign exchange fluctuations.

Blended ASP now hovers around US$22 to US$24 per thousand pieces of gloves. PBT margins for the glove segment improved to 13.7% in 1QFY19, from 11.3% in 1QFY18. We believe the margin improvement is the fruit of Kossan’s continuous cost-savings effort while price competition in the industry does not seem to have affected Kossan as much as its peers.

Target full commission of Plant 18 (+2.5 billion pieces per annum) has been pushed back to 3QFY19 from the initial target of 2QFY19. As for Plant 19 (+3 billion pieces per annum), the target full commission date remain unchanged, by 4QFY19.

Full commissioning of these two plants will boost Kossan’s installed capacity by around 20%, to 32 billion pieces per annum. Production capacity from Plant 18 and Plant 19 should be sufficient to support Kossan’s growth in FY20F to FY21F.

Land clearing work on the piece of Bidor land will begin in September 2019, to make way for its integrated manufacturing facility. It will take approximately nine months to complete the land clearing work and once completed, Kossan should be able to proceed with the constructions of plants. We understand that basic infrastructure like roads and flyover bridges are already being constructed. — PublicInvest Research, May 27