Kossan Rubber : Weak 2Q16, but tackling hurdles head-on BUY

SECTOR FOCUS OF THE DAY

Kossan Rubber : Weak 2Q16, but tackling hurdles head-on           BUY

We maintain Kossan Industries as a BUY with RM7.70 target price, based on target PER of 22x.

2Q16 revenue of RM403.8mil was 2.1% lower QoQ, but 4.7% higher on a YoY comparison. EBITDA however declined on both (QoQ: -17.4%, YoY: -9.6%) to RM70.0mil. Correspondingly, core net profit declined by 20.1% QoQ and 13.6% YoY to RM41.0mil. The underlying operating performance was generally weaker in 2Q16, attributable to, 1) loss of production volume due to scheduled revamp works on one of the plants since 1Q16, 2) increase in natural rubber price (up by 26% QoQ and 3.4% YoY) and natural gas price, 3) weaker RM (strengthened by 3.9% QoQ vs. US$) and, 4)  lower ASP (nitrile glove price declined by 9% YoY), partially attributable to competitive pricing practice in the industry. All in, the core earnings only accounted for 42% of our FY16 estimate.

We are leaving our earnings forecasts unchanged. While 2Q16 earnings were weaker than our expectations, the upgraded plant should resume operation in 3Q16. Hence, there could be some earnings catch up in 2H of the year. We also expect the revamped plant to gradually earn more on improved efficiency (output speed increased to 175 pieces/minute from 150 previously). Management is also planning to increase automation in the older plants to raise overall productivity. While this means some capacity downtime in the short term, the margin gain in the long term will be positive for the group. Our optimistic earnings growth projection through FY18 is mostly underpinned by capacity expansion drive. The group targets to increase its capacity by 18-20bil pieces p.a. over the next four years. The share price had loss some 32% of its value YTD. At the current price, the stock is trading at a decent  and is currently trading at a reasonable 15.4x forward PER.  

Others :

Axiata Group  : XL’s accelerated depreciation and ARPU dip         BUY

IOI Corporation : Manufacturing in the red in 4QFY16      HOLD

MISC : Negligible impact from Chevron FSO         HOLD

Sime Darby : Boosted by tax credit in 4QFY16      HOLD

WCT : Weaker-Than-Expected Earnings Recovery In 1HFY16        HOLD

MSM Malaysia : Supported by trading gains         SELL

QUICK TAKES

DRB-Hicom : Persona launched amid floundering Proton sales    BUY

Carlsberg Brewery : 2Q16 - A commendable quarter        UNDER REVIEW

NEWS HIGHLIGHTS

MISC : Bags RM925mil contract in first foray into Thailand

Property Sector : S P Setia revises sales target amid economic uncertainty

Airlines Sector : AirAsia X posts Q2 FY16 operating profit of RM20m