Kossan Rubber Industries 1H12 below expectations

MARKET PERFORM

Target Price: RM3.64

Period 2Q12/1H12

Actual vs. Expectations
The reported 1H12 revenue and net profit of RM594.2m and RM45.7m accounted for only 39% and 33% of our estimates. While the results were below our forecasts, these numbers are deemed to be in line with the consensus estimates, accounting for 48% and 42% respectively, with the 1H12 being seasonally weaker.

Dividends  
No dividend was declared.

Key Result Highlights

• YoY, revenue grew 10.6% to RM304.8m in 2Q12 driven by a higher quantity of glove sold (+26.8%) of 2.6b (vs. 2.05b in 2Q11), hence a decent glove revenue growth of 10.6%. However, the technical rubber products division only grew at a marginal pace of 0.4% driven by higher valued infrastructure products and new projects sales.  
• While the Average Selling Prices (ASPs) of glove were lower (see overleaf for details), its EBITDA and net profit margins improved to 19.0% and 7.8% from 14.0% and 7.6% respectively, owing to lower average raw material cost input (which is mainly latex).  
• QoQ, we also saw growth at both the top and bottom lines. Revenue and net profit grew 5.3% and 7.2% respectively. Similarly, the revenue growth was mainly driven by higher sales volume of glove of 2.6b pieces in 2Q12 as opposed to 2.5b in 1Q12, leading to a quarterly growth in glove revenue of 4.7%. The technical rubber division grew at a faster rate of 13.9%. However, this division only accounted for 12.5% of the total revenue.  
• Despite a higher effective tax rate of 22.6% in 2Q12 as opposed to 21.6% in 1Q12, the net profit margin still improved 14bps (from 7.61% to 7.75%) due to lower input cost.  
• Effective Installed Capacity for 1H2012 was 11.0b pieces, translating into an annualised utilisation rate of 91%.

Outlook  
We believe KOSSAN should deliver a better 2H12 driven by (i) strong demand, (ii) better product mix and (iii) additional capacity (see overleaf for details).

Change to Forecasts

• While the results were below our expectations, we are maintaining our earnings forecasts for now pending a meeting with management.
• However, there appears to be no risk to a downward revision as we notice that our net profit margin estimate of 9.1% is far higher than the realised net margin of <8%.

Rating 
Maintain OUTPERFORM due to the approximately 11% upside to our TP.

Valuation
Our TP of RM3.64 is based on 8.0x to FY13 EPS of 44.9sen. The targeted PER valuation multiple of 8.0x is the 3-year average historical PER.

Risks
Higher latex price and stronger ringgit.

Source: Kenanga