- We reaffirm our BUY recommendation on Kossan Rubber Industries with an unchanged fair value of RM3.80/share. This is based on an unchanged target PE of 15x FY14F earnings.

- Kossan reported a solid 3QFY13 net profit of RM35mil, lifting its 9MFY13 earnings to RM102mil (+37% YoY). This was in line with our and market’s expectations.

- The significant jump in Kossan’s 9MFY13 bottom line came on the back of a healthy 7% YoY growth in turnover to RM982mil as declines in ASP (in tandem with lower raw material costs) were outweighed by sizeable increases in gloves sales volume.

- On a sequential basis, 3QFY13 net profit rose by 6%, tracking its 4% increase in revenue. The quarter’s strong performance was also aided by growing contribution from its clean room division, with revenue and pretax profit more than doubling QoQ as capacity utilisation increased in line with the group’s penetration of new markets, especially China.

- The group’s TRP business also had a good showing, thanks to greater sales of higher-margin infrastructure and automotive products, lower input costs, as well as increased efficiency. The division’s pretax profit surged by 64% QoQ, and by 16% YoY for the nine-month period.

- Overall, Kossan’s EBITDA margin expanded by both QoQ (+1ppt) and YoY (+3ppts) to 18% - close to its peak of 19% back in FY09/10. This expansion could be attributed to the group’s lower cost structure (latex: -10% QoQ, -16% YTD and nitrile: -12% QoQ, -18% YTD), more efficient operations and improved product mix in its gloves and technical rubber divisions.

- Management declared a tax-exempt interim dividend of 3.5 sen/share, which placed it on course to meet our FY13F gross DPS forecast of 8 sen/share. Yields are presently at ~3.5%.

- We believe that Kossan remains well-positioned to gain from the present growth in glove demand (annual growth of 8%-10% for FY13F and FY14F). It has three new nitrile plants in the works which could potentially add 5bil pcs p.a. (or 30%) to its present installed capacity of 16bil pcs p.a. We expect about 125mil pcs to be commissioned in 4QFY13. Management had earlier announced its longerterm capacity target of 32bil pcs by FY18F.

- Valuation-wise, Kossan remains attractive despite its share price having performed exceedingly well (YTD: +95%). At current price, it is trading at a PE of only 13x FY14F EPS, below the sector’s CY14 average of 15x.

Source: AmeSecurities