-  We maintain our BUY recommendation on Kossan Rubber Industries (Kossan) but place our fair value of RM6.30/share (based on a PE of 12.5x FY14F EPS) under review pending a meeting with management.

-  Kossan posted a solid net profit of RM33mil for 2QFY13 to bring 1HFY13’s earnings to RM67mil. Earnings for the first six months were in line with our full-year forecast of RM134mil and consensus’ RM128mil, accounting for 50% and 52%, respectively.

-  Most of the group’s increase in revenue (1HFY13: +9%) was able to be filtered down to its bottomline - which surged 46% YoY - due to:- (1) its greater production efficiency; (2) better product mix (more surgical and nitrile glove sales); and (3) favourable raw material prices (latex: -12%YTD).

-  These factors had also helped expand its EBITDA margins by 4ppts YoY to 18%.

-  Compared to the preceding quarter, turnover was down by a marginal 2% following lower ASP (in tandem with declining input costs) and delivery timing differences, which were offset by higher sales volumes. QoQ net profit remained flat (+1%).

-  The group’s non-core technical rubber products (TRP) division (~10% of pre-tax) continues to perform well, with 1HFY13 pre-tax profit rising 9% YoY on the back of a 2% improvement in revenue following the recovery in the global automotive components market (60%-65% of TRP products are for the export market).

-  Future earnings enhancement for the division could come from its Indonesia plant, which we understand will begin construction in the coming months.

-  Looking ahead, we believe the upward growth trajectory for Kossan’s earnings will be underpinned by:- (1) its growing production capacity (FY13F: +20%; FY14F: +30%) amid robust global glove demand; (2) its focus on moving up the value chain (eg. customised grade gloves); (3) greater automation and plant efficiencies; as well as (4) bright prospects for its TRP business.

-  As usual, no dividends were declared this quarter. Although management has guided for a higher payout ratio of 40%-50% (from 25%-30% previously), its share price rally this year (+84% YTD) has resulted in yields compressing to an average of 3.2% for FY13F-FY15F.

-  Nonetheless, we believe current valuations are still attractive. Kossan is presently trading at a forward PE of 12.2x, a steep 42% discount to Hartalega’s 21x and 32% to Top Glove’s 18x.

Source: AmeSecurities