Results

9M13 revenue of RM982.4m (+7.1% yoy) was translated into a net profit of RM104.8m (+36.5% yoy) which came in within expectations, accounting for 74.1% and 77.0% of HLIB and consensus full-year estimates respectively.

In 3Q13, Kossan registered revenue of RM333.5m (+3.7% qoq, +3.4% yoy), EBITDA of RM60.9m (+7.8% qoq, +17.6% yoy), and PATAMI of RM35.4m (+5.8% qoq, +21.2% yoy).

Deviations

In line.

Dividends

Declared a tax exempt interim dividend of 3.5 sen per share (9M12: none) with ex-date on 6th Dec.

Highlights

Glove division’s 3Q13 sales was down by 1.6% qoq and 1.7% yoy chiefly due to lower ASP in order to pass on cost savings from lower material price to customers, although actual quantity sold was significantly higher.

During the quarter, natural latex and synthetic latex prices fell by 10% qoq and 12% qoq respectively.

3Q13 volume shipments achieved was ~3.1bn with NBR:NR mix of 55:45, elevating 9M13 sales quantity to grew 20% yoy.

Utilization rate reached 93% and awaiting new plant capacity to produce the lightest weight (3g) medical grade NBR gloves in the industry.

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. First plant is completing in Dec 2013 and expected to commence commercial production in Jan 2014.

Kossan expects the good performance to be maintained for the remaining quarter of 2013.

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

Unchanged.

Rating

BUY, TP: RM3.65

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 Kossan’s rating of BUY on the back of unchanged fair value of RM3.65 derived based on unchanged 12.8x CY14 EPS.

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 - 25 Nov 2013