Kossan’s RM29.2m net profit for 3QFY12 represented a healthy 23.7% q-o-q growth, which was well within our estimate. Its main operating divisions reported significant growth during the quarter, mainly due to easing raw material prices. We remain upbeat on the rubber glove sector as we had earlier anticipated robust earnings growth for glove makers due to the favourable operating environment. Thus, we are keeping our forecast for Kossan at this juncture. Maintain BUY with a FV of RM4.53, based on 13x FY13 PE.
Results in line. Kossan’s 9MFY12 results were in line with our estimates but slightly below consensus expectations, at 76.0% and 72.5% of the respective FY12 forecasts. Its net profit rose 23.7% q-o-q and 23.6% y-o-y, largely due to more favourable raw material prices and a stable USD/MYR exchange rate. On top of that, we think that the higher production efficiency at its factories due to increasing automation also helped to boost the company’s bottomline.
Operating divisions show improvement. On a q-o-q basis, the gloves division turned in commendable performance despite intense competition, recording a 6.9% growth in revenue and 28.1% jump in profit before tax, mainly due to increased capacity utilisation and lower raw material prices. Although the technical rubber product (TRP) division recorded lower revenue due to a lower average selling price, its profit before tax climbed 25.2%, spurred by improved margin. Meanwhile, revenue at Kossan's clean-room division surged 28.4% q-o-q while its losses narrowed to RM0.1m (vs RM0.3m in 2QFY12) as a result of the company's continuous efforts in penetrating new markets with new products.
Outlook still positive. As we stated in our sector report entitled, “Mid-Term Outlook Still Bright”, we remain upbeat on the rubber glove sector as the operating environment seems to be conducive for glove makers in the medium-term given the following: (i) the steady easing in the prices of raw materials, (ii) the Ringgit remains competitive, (iii) global demand for glove is still resilient, and (iv) the potential increment in gas and labour costs may only have a minimal impact on glove makers.
Maintain BUY, FV unchanged. Against the backdrop of our upbeat view on the sector, as well as the anticipated commencement of Kossan’s new surgical gloves production line in January 2013 giving margins a boost, we are maintaining our BUY recommendation for Kossan and RM4.53 FV, which reflects a 13x FY13 PE.
FYE Dec (RMm)
|
FY09
|
FY10
|
FY11
|
FY12f
|
FY13f
|
Revenue
|
842.1
|
1,046.9
|
1,090.0
|
1,179.9
|
1,271.8
|
Net Profit
|
66.7
|
113.4
|
89.7
|
98.4
|
111.4
|
% chg y-o-y
|
13.7%
|
70.0%
|
-20.9%
|
9.7%
|
13.3%
|
Consensus
|
-
|
-
|
-
|
103.2
|
118.8
|
EPS
|
20.9
|
35.5
|
28.0
|
30.8
|
34.9
|
DPS
|
9.0
|
8.0
|
7.0
|
9.2
|
10.5
|
Dividend yield (%)
|
2.8%
|
2.5%
|
2.2%
|
2.9%
|
3.3%
|
ROE (%)
|
20.3%
|
28.3%
|
19.1%
|
18.5%
|
18.4%
|
ROA (%)
|
9.9%
|
15.5%
|
11.3%
|
11.6%
|
12.0%
|
PER (x)
|
15.3
|
9.0
|
11.4
|
10.4
|
9.2
|
BV/share
|
1.12
|
1.38
|
1.55
|
1.77
|
2.01
|
P/BV (x)
|
2.85
|
2.30
|
2.05
|
1.80
|
1.58
|
EV/EBITDA (x)
|
9.5
|
6.2
|
7.5
|
6.4
|
5.6
|
Results Table (RMm)
FYE Dec
|
3QFY12
|
2QFY12
|
Q-o-Q chg
|
YTD FY12
|
YTD FY11
|
Y-o-Y chg
|
Comments
|
Revenue
|
322.7
|
304.8
|
5.9%
|
916.9
|
810.6
|
13.1%
|
ASP declined due to easing raw material prices
|
EBITDA
|
51.8
|
42.7
|
21.4%
|
135.1
|
118.2
|
14.3%
| |
Net interest expense
|
-1.5
|
-1.5
|
2.8%
|
-4.7
|
-5.7
|
18.0%
| |
Associates
|
0.0
|
0.0
|
n.m.
|
0.0
|
0.0
|
n.m.
| |
PBT
|
40.0
|
31.1
|
28.7%
|
99.7
|
85.7
|
16.4%
|
Margin improved due to easing raw material price
|
Tax
|
-10.0
|
-7.0
|
41.9%
|
-23.2
|
-17.0
|
36.5%
| |
MI
|
-0.8
|
-0.4
|
84.7%
|
-1.8
|
-1.1
|
52.5%
| |
Net Profit
|
29.2
|
23.6
|
23.7%
|
74.8
|
67.5
|
10.7%
|
In line with our expectations
|
EPS (sen)
|
9.14
|
7.39
|
23.39
|
21.12
| |||
DPS (sen)
|
5.00
|
0.00
|
5.00
|
0.00
|
The Board has declared a tax exempt interim dividend of 5.0 sen per share for the quarter under review
| ||
EBITDA margin (%)
|
16.0
|
14.0
|
14.7
|
14.6
| |||
NTA/share (RM)
|
1.73
|
1.68
|
1.73
|
1.50
|
Figure 1: Kossan's divisional performance
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Source: Company announcement
|
Figure 2: Natural rubber latex’s price movement
Source: Bloomberg, OSK Research
EARNINGS FORECASTS
FYE Dec (RMm)
|
FY09
|
FY10
|
FY11
|
FY12f
|
FY13f
|
Revenue
|
842.1
|
1,046.9
|
1,090.0
|
1,179.9
|
1,271.8
|
EBITDA
|
126.2
|
178.5
|
150.2
|
171.7
|
190.8
|
PBT
|
85.8
|
140.7
|
112.9
|
125.0
|
141.3
|
Net Profit
|
66.7
|
113.4
|
89.7
|
98.4
|
111.4
|
EPS
|
20.9
|
35.5
|
28.0
|
30.8
|
34.9
|
DPS
|
9.0
|
8.0
|
7.0
|
9.2
|
10.5
|
Margin
| |||||
EBITDA (%)
|
15.0
|
17.1
|
13.8
|
14.6
|
15.0
|
PBT (%)
|
10.2
|
13.4
|
10.4
|
10.6
|
11.1
|
Net Profit (%)
|
7.9
|
10.8
|
8.2
|
8.3
|
8.8
|
ROE (%)
|
20.3
|
28.3
|
19.1
|
18.5
|
18.4
|
ROA (%)
|
9.9
|
15.5
|
11.3
|
11.6
|
12.0
|
Balance Sheet
| |||||
Fixed Assets
|
360.7
|
410.6
|
438.0
|
466.7
|
491.5
|
Current Assets
|
327.9
|
366.7
|
374.4
|
420.6
|
480.0
|
Total Assets
|
688.5
|
777.3
|
812.4
|
887.3
|
971.5
|
Current Liabilities
|
260.9
|
272.8
|
245.9
|
253.3
|
260.9
|
Net Current Assets
|
67.0
|
93.9
|
128.5
|
167.3
|
219.1
|
LT Liabilities
|
68.6
|
60.0
|
60.2
|
60.2
|
60.2
|
Shareholders Funds
|
357.4
|
442.6
|
496.9
|
565.7
|
643.7
|
Net Gearing (%)
|
51.3
|
19.5
|
21.8
|
15.4
|
8.5
|
Source: OSK
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