PETALING JAYA: Kossan Rubber Industries Bhd’s strong earnings for the first quarter ended March 31, 2019 (Q1FY19) were ahead of analysts’ expectations, on the back of higher margins.
According to CGS-CIMB, Kossan saw an 18.8% year-on-year (y-o-y) increase in glove sales and increased contribution from its technical rubber products segment, despite the research house’s estimate of a 3% to 5% y-o-y decline in average selling prices during the first quarter of 2019.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margins for Kossan’s Q1FY19 rose 2.8 percentage points y-o-y to 18.3%, backed by higher economies of scale and ongoing cost saving initiatives.
Thus, Q1FY19 net profit grew 31.9% y-o-y to RM58.7mil.
Maybank IB Research noted that the industry’s average selling price (ASP) pressure had eased since April 2019 as demand had caught up with the new supply.
“We note that the industry’s nitrile glove ASP has been stable in April to May 2019, despite the lower nitrile rubber cost.
“Latex glove ASP has been raised by about 5% in May 2019 to reflect the higher latex cost.
“Given the improved operating environment, we believe Kossan’s strong earnings can be sustained,” said Maybank IB Research in a report on Kossan.
The group aims to build an integrated manufacturing hub on its land in Bidor, which will host 12 glove plants with a total capacity of 45 billion pieces per annum from 2022 onwards.
While UOB Kay Hian remains cognisant of an incoming stream of Malaysia glove manufacturers’ growing nitrile glove capacity by the mid-teens in 2019 against the backdrop of 11.9% demand growth, the research house expects some visibility for demand-supply balance by end-2019.
“While the US-China trade war would mean additional tariffs on China produced gloves from 10% to 25%, we opine it would only translate to marginal demand for Malaysia-produced gloves.
The research house raised its earnings forecast on Kossan by 7% and 5% for 2019 and 2020 after adjusting for better margins, with a raised target price to RM3.70 from RM3.45, in tandem with our higher earnings forecasts.
The target price is pegged to a 2019 price-earnings (PE) multiple of 20 times, in line with Kossan’s five-year forward mean PE of 20 times but below the sector’s 27 times.