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Friday, September 12, 2014

CIMB Research advises investors to accumulate Kossan

Source: http://www.thestar.com.my/Business/Investing/2014/09/12/CIMB-Research-advises-investors-accumulate-Kossan/

KUALA LUMPUR: CIMB Equities Research has recommended investors to accumulate Kossan  Rubber Industries as it trading a  discount to Top  Glove despite its strong fundamentals and consistent outperformance compared  to its peers in the past few quarters.
The research house said on Friday the company is less susceptible to the more intense competition in the industry while Kossan is trading at only 14.4times calendar year 2015 price-to-earnings (P/E), a discount to Top Glove.
CIMB Research said during its  recent tour of Kossan’s old and new plants which allowed it to reap manufacturing efficiencies over the past 10 years, management’s optimism was evident.
“Management is unperturbed by the intensifying competition and remains confident of delivering strong results. While we maintain our earnings forecast, our target price is raised as we roll over our valuation to CY16.
“We continue to value Kossan at 16 times (10% discount to Hartalega’s target P/E) and maintain our Add rating given its more diversified earnings base and more reasonable pricing which makes it less susceptible to keen competition. The key re-rating catalysts include an earnings boost from new capacity,” it said.
Despite the expected selling price pressure from the higher capacity availability in the industry, particularly in 2015, Kossan remains confident of achieving our FY15 earnings forecast. In fact, it guided that it may beat our forecast.
The company is confident that it will be able to fill up its upcoming capacity addition and is not concerned about the pricing pressure given that it is in the right segment (producing higher quality products) and sells its products at reasonable pricing.
“We like Kossan for the same reasons as well as its more diversified earnings base due to its exposure to clean room glove and technical rubber products.
“While Kossan’s EBITDA margin (20% in 1HFY14) is still below Hartalega’s margin (31% in 1QFY15), we believe the gap will narrow as the group’s nitrile contribution increases.
“We are also positive about its plans to expand TRP business in Indonesia and rubber glove production in Vietnam given the high demand and lower operating cost in these countries,” it said. 

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