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Tuesday, 9 May 2017 | MYT 2:57 PM

Better earnings for Kossan in the first quarter

PETALING JAYA: Kossan Rubber Industries Bhd, whose earnings has been impacted, among others, to price pressure in the glove segment, could see improvement  in earnings in the first quarter (Q1 17).

For the financial year ended December 31, 2016, Kossan Rubber’s net profit dropped to RM170.9 mil compared with RM202.5mil in FY 15. Revenue, however, stood higher at RM1.67bil against RM1.64bil in the previous corresponding period.

On a quarterly basis, net profit for the fourth quarter (Q4 16) was at RM44.6mil against RM55.2mil a year ago. 

The company said the decline in results from Q2 16 onwards were due to increase in minimum wage and natural gas price, and consistent industry wide pricing pressures ,particularly in glove segment. 

Kossan is expected to announce its Q1 17 results on 25 May.

UOB Kay Hian said on Tuesday it expect mid-to high-single-digit quarter-on-quarter (q-o-q) earnings growth on the back of higher glove sales volume contribution arising from a recovery in utilisation rates to more than 80% (Q3 16: 75-76%) at two older plants following the completion of major refurbishment works last quarter, and q-o-q margin expansion on firmer glove average selling price (ASP) and a more favourable US dollar to the ringgit in Q1 17.

Despite the absence of new production capacity coming on-stream in Q1 17, the brokerage expect Kossan to deliver 4%-5% q-o-q sales volume growth, thanks to the full restoration of glove production volume at two older plants following the completion of refurbishment works over the last two quarters.

The research house, which has upgraded the stock to a buy call with a target price of RM6.72, said apart from higher q-o-q glove sales volumes, it expect Kossan to benefit from firmer q-o-q nitrile and latex glove ASPs (which  would partially mirror Hartalega’s quantum of glove ASP revision of +5%-7% q-o-q) and a firmer US dollar to the ringgit at RM4.45/US$ in Q1 17 (4Q16: RM4.33/US$). 

Taking into account the confluence of the above factors, it project Q1 17 top-line to increase 8%-13% q-o-q. 

Following the completion of refurbishment works at two older plants, management had guided that it will now focus on restoring capacity growth in H2 17, with the construction of a new plant with an annual production capacity of 3.0bil pieces (+13.6%) scheduled for completion in June. 

The brokerage said it understand that the company’s its first factory (4.5bil pieces per annum) under its four year strategic expansion plan was initially scheduled to commence production in Q2 17 but has now been deferred to Q1 18 due to planning and water supply issues. 

The four year expansion plan entails the construction of four factories with more efficient production lines and new automated packaging. The expansion plans would add an estimated total production capacity of 18-20bil pieces per annum to the group upon full-commissioning in 2020, with the first plant scheduled to commence operations in Q1 18.

“While nitrile prices are generally more stable than latex’s, the former has risen 31% over the last three months, along with the recovery in global crude oil prices, averaging at US$1,348/tonne in Q1 17 (Q3 17: US$1,030/tonne). This was broadly in tandem with the 37% q-o-q increase in latex prices. 

“Nevertheless, prices of both latex and nitrile have fallen 13% and 15% respectively over the month and we expect this to offer glove makers’ some near-term respite. Still, we expect nitrile prices to trade higher at US$1,000-1,150/tonne on average in H1 17. 

“Our sensitivity analysis suggests that a 1% increase in nitrile and latex costs could reduce Kossan’s 2017-19 net profits by 2.8%-3.2%, assuming the additional costs are passed through to customers,’’ it added. 

Tags / Keywords: Corporate News , Analyst Reports

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