Kossan Rubber Industries - Something is brewing in Indonesia

News      In an announcement to Bursa Malaysia, Kossan Rubber Industries (Kossan) said it had incorporated a new subsidiary namely PT. Kossan Setia Jaya on 30 January 2013 under the laws of the Republic of Indonesia with an issued and paid-up capital of 1,200 shares of USD1000 each with a total nominal value of Rp11,610,000,000 or RM3.7m. Kossan Labuan Bhd and Kossan Sdn Bhd holds 99% and 1% respectively in the issued and paid-up capital of PT. Kossan Setia Jaya.  

 

Comments   We believe that this latest announcement by Kossan could potentially see it either venturing upstream into rubber plantations or expanding its technical rubber products (TRP) division in Indonesia. 

 We would be neutral on its rubber plantation venture if it does so. Although rubber plantations will help ensure a consistent supply of latex as well as a hedge against the volatility of rubber prices, however, investment into rubber plantations especially greenfields will likely yield zero or minimal returns in the early years since the gestation period for rubber trees is six years.  

 That said, we would be positive on its potential investment in expanding the TRP division. This is because the TRP division has been growing >20% QoQ at the pre-tax profit level over the past two quarters. E.g. for 9MFY12, the TRP division’s pre-tax rose >60% YoY and accounted for 13% of total group’s pre-tax profit. 

 

Outlook  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 line to produce another 0.6b pieces of surgical gloves is expected to be ready by end-Feb 2013. Kossan has managed to secure buyers for more than 85% of the new capacity.

 

Forecast  No changes to our forecasts.

 

Rating    Maintain OUTPERFORM

 

Valuation   Kossan is trading at just 8x FY13 earnings compared to Topglove and Supermax, which are at 15.0x over 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, Kossan appears more attractive at the current valuation. This is because Kossan has a bigger market capitalisation and earnings base compared with both Adventa and Latexx Partner. Our TP is based on a PER of10x, representing a -0.5 standard deviation below its 6-year average, over our FY13 EPS forecast of 36.4 sen.

  

Risks  Higher-than-expected input raw material cost

 Lower-than-expected volume sales  

Source: Kenanga