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Tuesday, August 27, 2013

Kossan Rubber Industries - The Party Continues

Source: http://klse.i3investor.com/blogs/kltrader/35608.jsp

Results in line. 2Q13 net profit of MYR34m (+1% QoQ, +42% YoY) brought 1H13 net profit to MYR67m (+46% YoY), making up 50% and 52% of our and consensus’ full-year forecasts respectively. While Kossan’s share price has done remarkably well (+84% YTD), we think its current FY14 PER valuation of 13x is still undemanding, compared to its bigger peers’ 16-17x. We maintain our forecasts but raise our TP to MYR7.12 (from MYR4.70), based on a target 15x FY14 PER (from 10x), still below our target PERs of 17-18x for its bigger peers. BUY.

2Q13: Stronger YoY. 2Q13 net profit of MYR34m was flattish QoQ on a flattish sales volume and stable EBIT margin of 14% (+0.1-ppt QoQ). However, it was much stronger on a YoY basis (+42% YoY) due to: (i) a much higher sales volume at its glove manufacturing division (+22% YoY); and (ii) a higher EBIT margin (+3.5-ppt YoY), owing to lower raw material costs.

Diversifying businesses. Though Kossan is still adding more nitrile glove capacity (+12% by 2Q14), it is also concurrently growing its other business segments in order to reduce its over-reliance in the nitrile segment. Other business segments which Kossan is currently growing are: (i) Technical Rubber Product (around 12% of total revenue), where there is a strong demand seen in the automotive sector in US; (ii) inhouse brand surgical gloves (“InTouch”), where it offers a cheaper surgical glove alternative to the emerging markets; and (iii) cleanroom gloves and face mask operation in China, where the contribution to group earnings is insignificant currently.

Maintain forecasts. Earnings in the sequential quarters may be stronger QoQ as more sales deliveries take place. We maintain our earnings forecasts for now, which has imputed for a 15% and 12% glove volume growth in FY14 and FY15 respectively. While Kossan’s forward PER of 13x is above its historicals, we still see further upward re-rating as there is a lack of investible glove plays and the big-cap peers have already traded up to 16-17x now.

Source: Maybank Research - 27 Aug 2013

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