The share price
performance of Kossan Rubber Industries (“KOSSAN”) has lagged its peers such as
Topglove Corp. and Hartalega. Its current valuations are still undemanding with
Kossan trading at 9.0x FY13 PER (vs. Top Glove’s 15.6x and Hartalega’s 16.0x).
In addition, the valuation gap should also narrows as (i) Kossan moves up the
value chain by offering higher margin surgical and clean room gloves and (ii)
the fact that Kossan’s product mix contains less natural rubber glove, which is
more sensitive to movements in latex prices. We are maintaining our OUTPERFORM
rating with a target price of RM3.64.
Our TP is based on a PER of 10.0x, representing a -0.5 standard
deviation below its 6-year average, over our FY13 EPS forecast of 36.4 sen.
New capacity with
secured buyers. The commercial
operation of its new production lines is expected to contribute to the earnings
growth in 2013. We understand that the nine-line production plant, which is set
to produce 1.3b nitrile gloves p.a., is now commercially ready. The production lines
for the remaining balance of 700m surgical gloves are expected to be completed
by Jan 2013. The new capacity will increase its output by 2.0b gloves to 14.0b.
Kossan has managed to secure buyers for more than 85% of the new capacity.
Better margins from a
14% capacity expansion. We
understand that the product mix for the new capacity will consist of 75%
nitrile and 25% surgical gloves. We expect this product mix to further
strengthen its profit margins. Generally, the average gross profit margins for
nitrile and surgical gloves are at 18% and 23%, respectively, as compared to
powdered gloves’ gross margin of 15%. We understand that the group targets to achieve
a product mix of 55% latex and 45% nitrile.
Clean room gloves
division to break even by end-FY12.
Recall that Kossan is venturing into clean room gloves via its acquisition of a 51%-stake in Cleanera HK
Limited (Cleanera) for US$3.1m (c. RM9.4m). Located in Dong Guan, China,
Cleanera is mainly involved in the manufacturing of clean room products such as
masks, wipes and gloves. The target industries include electronics, health and
safety. The acquisition allows Kossan
immediate access to Cleanera’s clean-room gloves facilities which the former
does not have. Typically, the average gross margin for clean room gloves is
23%. Management expects the clean room gloves division to break even in
FY12.
Compelling
valuations. KRI is trading at just
9.0x FY13 earnings compared to Topglove and Supermax, which are at 16.0x their
FY13 earnings. The valuation gap should narrow as (i) Kossan moves up the value
chain by offering higher margin surgical and clean room gloves and (ii) the
fact that Kossan’s product mix contains lesser natural rubber glove, which is
more sensitive to movements in latex prices. Going by the recent acquisition of
both Adventa and Latexx Partner at PERs of between 13.0x and 16.0x, KRI appears
more attractive at current valuation. This is because KOSSAN has a bigger
market capitalisation and earnings base compared with both Adventa and Latexx
Partner.
Source: Kenanga
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