Kossan Rubber Industries - Earnings boost from Technical Rubber Products BUY

• Kossan Rubber Industries (Kossan) reported a flattish net profit of RM24mil for 4Q, bringing full-year earnings to RM91mil. The results met our expectations coming in on the dot, but accounted for only 95% of consensus.

• Kossan chalked up a higher turnover for FY11, up 4% YoY on the back of:- 1) Higher sales from improved demand for its Technical Rubber Products (TRP) due to increased infrastructure projects (YoY: 20%) and; 2) Several upward revisions to ASPs from core rubber gloves division (YoY: 3%). 

• Despite this, the bottomline declined 19% over the same period, as benefits of higher ASPs were more than offset by EBITDA margin that fell 2.4ppts to 15% due to higher latex costs. As an indication, latex price rose by  an average of 20% for FY11 compared to the preceding year.

• NR latex, which makes up the bulk of Kossan’s total operating costs at 56%, will continue to track rubber price volatilities in the market. 

• Even though SMR20 grade bulk latex prices are on an upward trend since January 2012, we are not too concerned as the seasonal rubber trees ‘wintering season’ typically sees less yield, thus lending support to higher rubber prices. We believe rubber prices would ease over the long term on the back of excess supply and weakening rubber demand from global automobile industry.

• Additionally, Kossan’s strategic move into higher valued non-NR gloves, namely cleanroom variants, would serve to mitigate the group’s earnings risks over the long run. It aims to boost manufacturing of non-NR gloves from 40% of its product mix to 50% by end-FY12F.   

• The group’s expansion plans are on track, with additional capacities to drive earnings growth moving forward. Total installed capacity is set to rise by 2.5 billion pieces by July FY12F, and a further 2 billion pieces by next year. All in, the additional lines will bring the group’s installed capacity to a total of 17 billion pieces per annum by end-FY13F.

• We maintain our BUY rating on Kossan with an unchanged fair value of RM4.31/share, based on a fair PE of 12.5x FY12F earnings. We continue to like the group for its less susceptible earnings portfolio as underpinned by its more balanced product mix. Our valuation is a tad above  the stock’s 10-year mean of 11x, but still at a 35% discount to industry leader Top Glove Corp’s (TOPG Mk Equity, Buy) fair PE of 19x. 

Source: AmeSecurities