Results

1Q13 revenue of RM327.3m (+2.7% qoq, +13.1% yoy) was translated in a net profit of RM33.2m (+12.0% qoq, +51.3% yoy), accounting for 27.7% and 27.2% of HLIB and consensus full-year estimates respectively.

We consider this in line as we are anticipating a weaker 2Q12 on the back of strengthening of MYR against USD.

Deviations

• Largely in line.

Dividends

• None (1Q12: None).

Highlights

1Q13 revenue grew resiliently with major contribution coming from gloves division (+3.0% qoq, +13.9% yoy) where increased capacity utilization resulted in higher production output. At PBT, gloves division grew (+19.7% qoq, +56.9% yoy) thanks to lower raw material costs.

Both technical rubber products (TRP) and clean room divisions also saw positive top line expansion along with profitability yoy but PBT declined qoq as TRP was impacted by the implementation of minimum wages while clean-room suffered from underutilization of newly installed facilities and expenditure of on-going development cost.

Kossan guided that overseas sales will continue to drive top line growth on the back of sustainably profitability. It is vigorously upgrading and increasing capacity expansion to meet demand while balancing optimum product mix.

Clean-room division is expected to undergo a strong growth in FY13 as its gloves are being widely accepted by customers.

Risks

• Spike in latex prices.
• Weaker USD against the MYR.
• Delays in capacity expansion plans, causing a hold back in capturing oncoming glove demand.

Forecasts

• Maintained.

Rating

BUY, TP: RM4.75

• Positives – Balanced 50:50 product mix of nitrile and NR gloves will allow it to cater to both markets and mitigate risks from sudden price hikes in either nitrile or NR latex.
• Negatives – We believe Kossan has been a sector laggard due to its lack of specialization (of being predominantly a nitrile, NR, or OBM glove player).

Valuation

• Maintain BUY call on the equity based on unchanged TP of RM4.75 derived based on 10.5x CY14 EPS.
• Even after recent raise in share price and P/E multiple (from 8.5x to 10.5x), we do note that our valuation for Kossan remains low compared to the recent M&As (Latexx Partners and Adventa) that valued them around PERs of 10-12x.
• While the reported deadly flu outbreaks (H7N9 in China and Coronavirus in Middle East) are yet to be fully overcome, positive market sentiments towards rubber glove players should be sustainable.

Source: Hong Leong Investment Bank Research - 28 May 2013