Kossan 'sell', Lafarge 'reduce', Petronas Chemical 'buy', N2N connect 'buy'


  • Analyst Reports
  • Wednesday, 21 Nov 2018

Over the medium term, Kossan aims to boost its manufacturing ability by another 18 billion gloves per year, which translates to a five-year compound annual growth rate of 10% in 2019 to 2023.

Kossan Rubber Industries Bhd

By UOB KayHian

Sell (Maintained)

Target price: RM3.64

HAVING ramped up activities at Plant 16, coupled with strong demand, Kossan’s net profit for the third quarter of financial year 2018 increased 25% quarter-on-quarter (q-o-q) to RM54mil.

This brought the bottom line for the nine-month period to RM142mil, which was within expectations, making up 71% of UOB KayHian’s full-year forecasts but coming in below street estimates of only 68% of annual projection.

Total revenue nudged up 16% q-o-q in the third quarter.

The glove division saw sales grow 17% q-o-q on robust demand, with volume up 8% q-o-q, forex tailwinds up 7% q-o-q as the US dollar appreciated against the ringgit, and positive average selling price revision up 2% q-o-q due to cost pass-through.

Kossan’s plant capacity utilisation rate appears to have remained steady at above the 80% mark and forward orders were still robust.

“This is bucking the trend, unlike two of its peers, and we suspect Kossan may be taking market share away from competitors.

“Regardless, it will be a more competitive business environment from now on, considering more nitrile glove supply capacity is coming on stream in the near term, and the vinyl glove undersupply in China is recovering as capacity restarts after 2017 environmental clampdown, prompting price-sensitive food and beverage customers to switch back to more economical glove offerings,” said UOB KayHian.

Kossan is now able to produce up to 26.5 billion gloves annually as it has fully installed eight manufacturing lines at its Plant 16 Jalan Meru site.

Also, the five lines at Plant 17 have been fully commissioned during the quarter as per guided.

The targeted commissioning timeline for Plant 18 (second-quarter 2019) and Plant 19 (fourth-quarter 2019) are intact, which will see the company’s annual production capacity jump to 32 billion pieces of gloves.

Over the medium term, Kossan aims to boost its manufacturing ability by another 18 billion gloves per year, which translates to a five-year compound annual growth rate of 10% in 2019 to 2023.

Kossan intends to have a centralised and integrated facility based at one location with an additional 45 billion pieces of gloves per annum when completed over eight years instead of two separate places – Bestari Jaya and Kuala Langat.

UOB KayHian maintains its “sell” but with a revised target price of RM3.64 as it pegs the stock to a higher 2019 price-earning multiple of 20 times due to a realignment exercise, in tandem with the recent valuation bump-up for Top Glove.

LAFARGE MALAYSIA BHD

By CIMB Research

Reduce (No change)

Target price: RM1.78

LAFARGE’S core net loss of RM126mil for nine months of financial year 2018 (FY18) made up 98% of CIMB Research’s full-year net loss forecast of RM128mil and 70% of consensus net loss forecast of RM180mil.

Results were below the research house’s expectations, dragged by weaker-than-expected demand, more competitive pricing, higher coal cost and higher petcoke prices.

Operating cost advanced 3.1% while revenue declined 1.3% year-on-year (y-o-y).

Core net loss in the third quarter of RM87mil was the seventh quarterly loss since it slipped into the red in the first quarter of FY17.

In the notes accompanying its results, Lafarge said it expected the operating environment for the second half of 2018, particularly fourth-quarter 2018, to remain challenging.

Key factors are weakening demand for cement and concrete, excess capacity placing sustained pressure on selling prices, and upside risks to energy cost.

Similar to first-half 2018, export-bound clinker demand should buck the trend in the second half due to improving selling prices.

Its nine-month segmental breakdown highlighted the widening operating losses for the cement division and a 53% y-o-y increase in operating losses to RM174mil.

The ready-mix segment booked a steep 85% y-o-y decline in operating profit to RM900,000.

The weakening of domestic cement demand as a result of the downturn in contracts rollout, a still-weak property market and higher operating costs is likely to weigh down on earnings for FY19 to FY20.

CIMB Research retains its FY18 net loss and FY19-FY20 net profit pending more details on the new management’s strategy during the post-results meeting next week.

Overall, FY18 is set to be the group’s second year of losses.

Petronas Chemicals Group Bhd

By MIDF Research

Buy (Maintain)

Target price: RM10.23

PETRONAS Chemicals’ (PetChem) earnings for third-quarter FY18 expanded by 37.7% y-o-y to RM1.26bil. The commendable profit is premised on strong revenue growth of 20.4% y-o-y to RM4.83bil.

The upbeat sales figures are a result of stronger crude oil price and higher average selling prices.

Product volume declined by 8.8% y-o-y to 2,249 tonnes for the third quarter of FY18 compared with 2,466 tonnes in third-quarter FY17 due to the turnaround activities.

However, annual production volume is forecast to be above 10,000 tonnes per annum for FY18.

The nine-month FY18 normalised earnings, excluding loss of partial divestment of subsidiary and forex losses, met MIDF Research’s and consensus expectations at 86% and 85% of FY18 full-year earnings estimates, respectively.

Overall profit after tax and minority interest margin sustained at a healthy level of 26% for the quarter.

Management continues to guide that despite the heavy turnaround activities, the average plant utilisation rate for the group is expected to remain above 90% for FY18, similar to that of FY17.

Bulk of the heavy turnaround was completed in the third quarter of FY18 while plant utilisation rate for the second half of FY18 is expected to drop to 85%.

The nine-month FY18 plant utilisation rate is currently at 91%.

In the third quarter of FY18, turnaround has been completed on its ethylene cracker and methanol Plant 2 while in the fourth quarter of FY18, turnaround will be conducted on its fertiliser facility.

“Management also guided that going forward into FY19, its growth capital expenditure will be RM2.5bil, which is 50% lower than that of FY18, due to its joint venture with Saudi Aramco.

“Meanwhile, its operational capex is to remain in the range of RM750mil to RM850mil for FY19,” said MIDF Research.

There is no change to earnings estimates as the research house is expecting product pricing to be under pressure due to the drop in crude oil price.

Demand for olefins and derivatives segment products is expected to soften, given ample supply coming from the Middle East and North Asia.

“Despite the heavy turnaround and lower plant utilisation rate albeit more than 90% for FY18, we remain upbeat on PetChem due to the continued resilient demand for its product and consistent production volume, which is expected to record more than 10,000 tonnes this year.

N2N CONNECT BHD

By AmInvestment Bank

Buy

Fair value: RM1.50

BUDGET 2019 aims to widen the scope of the sales and service tax (SST).

On top of the proposed digital tax on imported consumer services such as Spotify, Netflix and Steam, which will be implemented in 2020, there will also be a tax on digital services at the commercial level which will commence in January 2019.

This is to ensure that local service providers and its foreign competitors are on a level playing field.

Digital tax at the commercial level could potentially impact companies that rely on foreign digital services such as web hosting, cloud storage, payment gateway and customer-relationship management.

Amazon Web Services (AWS), Dropbox, Shopify and Zoho are a few of many foreign suppliers that provide digital services to local companies but do not have a physical presence in Malaysia.

Operationally, N2N does not rely on foreign web hosting services such as AWS to run its network. The company hosts its servers via third-party local service providers.

Instead, the concern may be on N2N’s market data subscription (for example, consensus estimate, price quotes and volume) from a foreign supplier which could be subjected to digital tax.

These data are featured on its TCPro Global trading platform.

However, there are still many unanswered questions with regards to the framework and implementation of the digital tax system.

For instance, foreign digital service providers may not be compelled to be registered under the local SST system, and there are also queries if the digital tax would be passed on to customers.

Due to the ambiguity of this matter, N2N is unable to quantify the impact until further clarification from the government in next month.

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Analyst reports , Kossan , N2N , Lafarge , Petronas Chemicals ,

   

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