Kossan’s 1HFY12 earnings of RM46m were within our expectations but slightly below consensus, representing 47% and 43% of the respective FY12 forecasts. Revenue and earnings went up by 12% and 4% y-o-y respectively, mainly due to higher sales volume, expanding margins as the cost of raw materials such as latex prices declined, and a favourable USD/MYR exchange rate. As the results were largely in line, we are maintaining our BUY call but lift our FV to RM4.53 from RM4.00 previously as we roll over our valuations to FY13, pegged at a 13x PER. Kossan’s plant expansion appears to be on track. The company may be able to commercialise nitrile production by Sept 2012, which will boost its annual capacity by 13.5%. We note that Kossan’s current valuation is at an undemanding 10x on our FY13 earnings forecast. Maintain BUY.
Numbers in line. Kossan’s 1HFY12 results were within our but below consensus expectations, making up 47% and 43% of the respective FY12 forecasts. YTD, its top- and bottom-lines expanded by 12% and 4% to RM594m and RM46m respectively owing to higher sales of 2.6bn pieces in 2QFY12, up 27% y-o-y and 5% q-o-q. In addition, the decline in cost of raw material such as latex, as well as better operating efficiency at its factories due to automation further boosted earnings. Q-o-q, the group’s revenue, PBT and earnings rose 5%, 9% and 8% to RM305m, RM31m and RM24m respectively, boosted mainly by its core technical rubber products division, whose revenue and profits surged 14% and 29% q-o-q respectively due to lower latex cost and better production efficiency. While Kossan’s clean-room division registered a 14% revenue growth over the quarter, it continued to incur losses due to the development costs of clean-room gloves. Nonetheless, we expect the division to perform better and earnings to kick in by 3QFY12 via expansion in its mask and wipes products and marketing efforts.
Smooth progress in capacity expansion brightens outlook. We gather that Kossan’s plant expansion is on track and will see the company commercialise nine of its nitrile production lines by 3QFY12. This will boost its total annual capacity to 12.5b pieces (+13.5% to its current 11bn pieces). The group also expects its nine surgical glove lines to commence production in 4QFY12. While the surgical glove segment currently accounts for only about 4% of the group’s total sales, management has indicated that it will pay more attention to this segment going forward as there is better pricing power as well as wider margins for such value-added products.
Outlook & Recommendation
Rubber glove sector still in good health. We believe that the current weak economic sentiments in the Eurozone will not adversely affect the rubber glove sector. Although European sales contribute about 30% of rubber glove manufacturers' sales, the potential slowdown in sales would be well compensated by the stronger USD/MYR exchange rate and weaker latex prices following the recent retracement in the prices of most commodities, as well as the better operating efficiency resulting from the automation of Kossan’s factories. Hence, we see the absolute net profits of most rubber glove companies likely to be sustainable.
Maintain BUY. With Kossan’s earnings being within expectation, we are maintaining our forecast of 8% and 13% earnings growth for both FY12-13 as well as our BUY call for Kossan. We take this opportunity to roll over our FV to FY13 earnings based on an unchanged PER of 13x. With that, our FV now stands at RM4.53 (previously RM4.00). We continue to like Kossan as it has a balanced product mix comprising 53% natural rubber and 47% nitrile gloves. This enables it to capture all markets. Note that the stock is currently trading at an undemanding PER of 10x on our FY13 valuations vs the industry average of 14x. Maintain BUY.
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