Results

1H13 revenue of RM648.8m (+9.2% yoy) was translated into a net profit of RM68.1m (+46.5% yoy) which surprise on the upside, accounting for 56.2% and 53.0% of HLIB and consensus full-year estimates respectively.

Deviations

Higher-than-expected margin largely attributable to low raw material costs and cost savings from continuous production efficiency improvements.

Dividends

None (1H12: None).

Highlights

2Q13’s sustained sequential performance elevated 1H13’s sales by 9.2% to RM648.8m with major contribution coming from gloves division (+10.0% yoy) where increased capacity utilization resulted in higher production output along with better product mix biased to nitrile gloves. At PBT, gloves division grew astonishingly at +51.6% yoy thanks to lower raw material costs and improved production efficiency.

Utilization rate was approximately 82%.

Capacity expansion is on track with 3 new plants housing additional 34 lines, adding no lower than 5.0bn pieces of gloves to existing capacity of 15-16bn pieces per annum.

Continuous upgrade and expansion are also underway to produce customised (examination and surgical) gloves which command better margins. Kossan is expecting the sale of its in-house brand surgical gloves to grow.

Kossan guided that the technical rubber market remains stable and believe that USA’s automotive sector recovery will spur Kossan’s profitability.

Kossan has also automated the production of clean-room division leading to cost savings. It also anticipates higher demand as more customers have approved the usage of clean-room glove in the electronic industry.

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

Adjusted model based on deviations above and minor tweaking of other variables. In turn, FY13-14 EPS were revised upward by 18.1% and 26.1% respectively.

Rating

BUY, TP: RM7.30

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

We upgrade Kossan’s rating from HOLD to BUY after raising our TP by 26.7% from RM5.76 to RM7.30 derived based on unchanged 12.8x CY14 EPS as a result our earnings revisions.

Kossan’s PE multiple of 12.8x was derived by discounting 4x to the average of Hartalega and Top Glove’s PE multiples. On average, Kossan has been trading at 4x discount to peers for past 5 years.

Source: Hong Leong Investment Bank Research - 27 Aug 2013