Results

FY13 revenue of 1.3bn (+6.0% yoy) was translated into a net profit of RM144.4m (+34.7% yoy) which came in within expectations, accounting for 102% of HLIB’s full year forecast but ahead of street’s by 6.1%.

In 4Q13, Kossan registered revenue of RM327.4m (-1.8% qoq, +2.8% yoy), EBITDA of RM61.1m (+0.3% qoq, +13.2% yoy), and PATAMI of RM38.6m (+8.9% qoq, +30.0% yoy).

Deviations

In line.

Dividends

None (4Q12: none).

YTD dividend amounted to 7 sen per share (FY12: 4 sen).

Highlights

Glove division’s 4Q13 sales was down by 0.8% qoq and 1.4% 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.

Kossan is very optimistic with the continuing improvement in the US market Europe’s recovery as it has very substantial exposure to these countries.

However, the acute shortage of labour and increasing utility cost is a concern and measures are in place to mitigate the impacts.

Speedier production lines were installed to reduce gloves division’s cost. Continued investment in R&D will improve production processes, quality, reduce cost as well as develop new products in order to meet customers’ stringent requirements.

Engineering and automation will help to reduce headcounts, overcoming the shortage of labour and the consumption of water, electricity and gas.

Clean-room division continue to receive accreditation from multinational electronics companies, endorsing its global acceptability.

Kossan expects to achieve good results in all divisions going forward.

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 while we introduce FY15 and FY16 forecasts.

Rating

HOLD, TP: RM4.81

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 – exposure to possible supply glut as a result of over aggressive expansion by all glove players.

Valuation

Reiterate HOLD call although we have raised our fair value by 31.8% from RM3.65 to RM4.81based on unchanged PE of 12.8x as we rollover our valuation to CY15.

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

Source: Hong Leong Investment Bank Research- 27 Feb 2014