Kossan Rubber - Quietly achieving BUY

- We maintain our BUY rating on Kossan Rubber Industries (Kossan) with an unchanged fair value of RM4.60/share, based on a target PE of 12.5x its FY13F earnings.

- Kossan posted a healthy 11% YoY improvement in earnings to RM75mil for 9M12 on the back of a 13% increase in revenue.  This accounts for 68% of our forecast of RM112mil for the full year. 

- Nonetheless, we are not too concerned given that its results are seasonally stronger in the fourth quarter and it should be no different for 4QFY12. In addition, we believe that the usual higher effective tax rate in 3Q12 (25% vs. our FY12F forecast of 20%) muted growth. (PBT was up 16% YoY, 29% QoQ.)

- We believe its better earnings can be attributed to the much lower latex input costs (9M12 vs. 9M11: -28%) and accordingly, higher sales volumes (+ 25% YoY and a lesser 13% QoQ) as more re-stocking activity takes place.

- As we had stated in our sector report dated 22 Nov 2012, the better operating environment resulted in a sequential EBITDA margin expansion of 2ppts to 16%. Although commendable, this is still below its peak of 19% experienced back in FY09/10.

- Kossan’s strategic decision to focus on the higher  valueadded gloves (i.e. surgical and cleanroom) is beginning to pay off.  Its cleanroom division is expected to break even in FY12F and contribute positively to earnings beginning FY13F. (The losses were due to the development cost of clean-room gloves.) 

- In tandem with the recovery seen in the construction and infrastructure industry this year, Kossan’s non-core technical rubber products division (TRP) saw 9M12 PBT jumping 65% YoY, contributing 13% overall. Efforts being made to further develop this business include its plan to invest RM12mil in a new plant in Jakarta.

- Kossan declared a first interim dividend of 5 sen/share, payable on 21 December 2012. This makes up ~55% of our FY12F gross DPS forecast of 9 sen, corresponding to management’s dividend payout ratio of 30%.

- Looking ahead, Kossan’s FY12F and FY13F growth will be underpinned by sustainable global glove demand (YoY growth of 8%-10%).  We believe Kossan is well-primed to cash in on this opportunity as its installed capacity will rise to 15.2bil pieces (+26% from currently installed capacity) by end-FY13F as supplies from its new plants, as well as recent  plant upgrades, come onstream progressively.

- We continue to like Kossan for its strong underlying fundamentals, more balanced product mix and consistent earnings delivery.   

Source: AmeSecurities