Friday 25 May 2012

KOSSAN (FV RM4.00 - BUY) 1QFY12 Results Review: A Decent Start to 2012


Kossan’s 1QFY12 results were below expectations and this was mainly due to the volatility in the latex price, resulting in some time lag in passing on the cost increase to its customers. Also, the 1QFY12 results were affected by the new product development cost from the clean-room division. Hence, we are tweaking down our FY12-FY13 earnings by 12%-13% respectively. Maintain  Buy with  a lower FV of RM4.00 (previously RM4.60) based on existing PER of 13x FY12 EPS.

Below expectations. 1QFY12 results were below consensus and our expectations, making up 18% and 19% of the  respective  FY12 forecasts. The lower-than-expected results were mainly due to the volatility in the latex price, resulting in some time lag in passing on the cost increase to its customers. Also, the 1QFY12 results were affected by the new product development cost from the clean-room division. With that, although the 1QFY12 revenue of RM289.4m was marginally up by 3.9% q-o-q, its net profit of RM22.0m was down by 7.1% q-o-q. On a YTD comparison, its revenue was up by 12.9%, contributed by the higher sales volume as a result of higher production capacity but its net profit was still down by 4.4% based on the reasons mentioned earlier.

Tweaking down our FY12-FY13 earnings by 12%-13%. This is to factor in the slowerthan-expected 1QFY12 results. Rubber glove sector still resilient. In our view, we believe the impact from the European crisis on the rubber glove sector may not be as critical as that on other sectors. Despite European sales contributing about 30%-40% to the rubber glove manufacturers' sales, the potential slower sales volume would be compensated by the stronger USD/MYR exchange rate  and lower latex price following the recent price  retracement of most commodities. Hence, the absolute net profit figures of most rubber glove companies would likely be sustainable, if not see an increase from the higher production capacity.  On the other hand, the risk to this view is the stronger-than-anticipated competition, especially from China where some of the glove makers there may potentially get tax rebates from the government and hence, able to slash prices to compete aggressively.

Maintain BUY.  We  are  tweaking down our fair value  on the company to RM4.00 (previously RM4.60) based on  existing  FY12 PER of 13x, following our FY12 earnings downgrade. Nevertheless, we continue to like Kossan as a balanced player with a product mix comprising almost 40:60 natural rubber and nitrile gloves, which enables it to target all markets.

Source: OSK

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