Kossan: Financial Performance Letdown by Glove Division

Result Update

For QE30/6/2018, Kossan's profit before tax rose 4% q-o-q on the back of a 3%-increase iin revenue to RM497 million. When compared to the same quarter last year, profit before tax dropped 2% while revenue increased by 1%.. The improved q-o-q performance was mainly attributable to the improved performance in the Technical Rubber division. How did the Gloves division perform?


Table 2: Kossan's last 8 quarterly results

You can see from Table 2 below that Kossan's Glove division had suffered decline in revenue and pre-tax profit in the past 2 quarters! That's a serious blow for Kossan because its competitors, such as Harta, Topglove and Supermx had been done very well in the past 2 quarters. Kossan has announced plan to invest RM1.5 billion to build new plants on its recently acquired land in Bidor, Perak (here). 

Table 2: Kossan's segmental performance for 1Q2018 & 2Q2018  

Kossan's top-line, bottom-line and profit margin have been moving sideways for the past 4-5 quarters.


Chart: Kossan's last 48 quarterly results

Valuation

Kossan (closed at RM4.43 last friday) is now trading at a PE of 31.6 times (based on last 4 quarters' EPS of 14.04 sen). At this PER, Kossan is deemed fully valued.

Technical Outlook

In late July, Kossan surpassed its December 2015 high of RM4.61 when it made a new all-time high of RM4.72. This failed breakout could be a set-up for a reversal. Be careful!


Chart 1: Kossan's monthly chart as at Aug 17, 2018 (Source: ShareInvestor.com)


Chart 2: Kossan's weekly chart as at Aug 17, 2018 (Source: ShareInvestor.com)

Conclusion

Kossan's relatively healthy financial performance belied its weakened position in the glove industry. Notwithstanding the under-performance, Kossan share price was able to make a new all-time high momentarily- probably induced by a share split exercise that was completed in July. I believe this situation cannot persist for long, and the likely outcome would be a price rollback. Thus, I revised my rating for Kossan from a BUY to a SELL.

Note: 

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.