Kossan Rubber - Earnings rebounded in FY12 BUY

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

- Kossan reported earnings of RM30mil in 4QFY12 (+2% QoQ and +24% YoY), bringing FY12’s net profit to RM104mil (+17% YoY). The results accounted for 89% of consensus and 94% of our estimate. We deem the results to be in-line as the variance can be attributed to a 4ppts higher-than-expected effective tax rate of 24% (FY11: 20%).

- The group’s solid performance in FY12 was driven by:- (1) increased production efficiency, (2) higher glove sales volume (+9% YoY); (3) a more optimum product mix as it moves to nitrile:latex of 50:50 from 43:57; and (4) favourable input prices (latex and nitrile input prices are off their 2011 highs by ~40%).

- Kossan’s non-core technical rubber products (TRP) division (12% of revenue) continued to perform well. YoY, its revenue grew by 9% while PBT jumped 62% as a result of the improved operating environment. Management believes this positive trend will continue in FY13F on the back of robust demand for infrastructure products and automotive parts.

- We expect Kossan to achieve a higher EBITDA margin of 16% for FY13F and FY14F (FY12: 15%; FY11:14%) given its focus on producing higher yielding glove products. The group’s 9 surgical glove assembly lines are set to be completed and fully commissioned by the end of this month.

- In addition, Kossan’s cleanroom segment has also begun to turn around (QoQ PBT: +730%) as it successfully captured new markets with new products. With waning development costs, we believe this division will contribute positively to Kossan’s FY13F’s margins.

- Moving forward, we believe Kossan’s earnings growth will continue to be capacity-driven, underpinned by its target to have an installed capacity of 24bil pcs per annum by 2018. Total capacity in FY13F will be boosted by 30% from the current 14.5bil pcs per annum with utilisation rates remaining between 88%-90%.

- In-line with that mid-term objective, Kossan had recently purchased a 56-acre land in Batang Berjuntai, Selangor for RM35.4mil. We understand that the group will be able to build 7-8 new plants on this plot (based on its current 6.4 acre/plant).

- Given the sustainable global glove demand (growth of 8%-10% for FY13F) and smooth implementation of its expansion programme, we continue to expect an upward growth trajectory for Kossan’s earnings in FY13F and FY14F. We have thus projected earnings of RM118mil (+13%) and RM132mil (+12%) for the 2 years, respectively.

Source: AmeSecurities