- We maintain our BUY call on Kossan Rubber Industries with an unchanged fair value of RM5.85/share. Our fair value is pegged to an unchanged PE of 17x over its FY15F earnings.

- In an announcement to Bursa Malaysia last Friday, Kossan said that it has entered into a memorandum of understanding (MoU) with the Institute of Rail Transit (IRT) of Tongji University in China through its 70%-owned subsidiary Doshin Rubber Products (M) Sdn Bhd which manufactures and deals in rubber products.

- The MoU is intended to form a strategic alliance between the parties to design, manufacture and market rubber pads for floating tracks.

- Under the MoU, IRT will help market Doshin’s products which are relevant to China’s urban rail projects and also provide technical support to any of Doshin’s projects outside China upon request. In return, Doshin will manufacture the rubber pads based on IRT’s designs.

- We understand that the MoU will be in effect for two years from its date of signing, which is 16 September 2014. It may be cancelled by mutual agreement at any time and may also be extended for a further period.

- We believe this signing is beneficial to the group as it can not only expand its technical rubber products (TRP) range, but also its technical expertise/knowledge. In addition, the group will have a stronger footing in the growing China market.

- In 1HFY14, Kossan’s revenue and pretax margin for its TRP business had each increased by 10% YoY. The division contributes ~13% to Kossan’s total revenue.

- We are leaving Kossan’s FY14F-FY16F earnings estimates unchanged for now. We expect an upward trajectory in earnings for both Kossan’s glove and TRP divisions. Growth in the latter will be underpinned by rising demand for infrastructure, automotive and marine rubber products as well as margin expansions from lower input costs and greater automation. Lower latex prices enable it to price its products more competitively.

Source: AmeSecurities