Journey to Wealth
Kossan Rubber Industries - Earnings boost from Technical Rubber Products BUY
' Kossan Rubber Industries (Kossan) reported a flattish net profitof RM24mil for 4Q, bringing full-year earnings to RM91mil. The results met ourexpectations coming in on the dot, but accounted for only 95% of consensus.
' Kossan chalked up a higher turnover for FY11, up 4% YoY onthe back of:- 1) Higher sales from improved demand for its Technical RubberProducts (TRP) due to increased infrastructure projects (YoY: 20%) and; 2)Several upward revisions to ASPs from core rubber gloves division (YoY: 3%).
' Despite this, the bottomline declined 19% over the same period,as benefits of higher ASPs were more than offset by EBITDA margin that fell2.4ppts to 15% due to higher latex costs. As an indication, latex price roseby an average of 20% for FY11 comparedto the preceding year.
' NR latex, which makes up the bulk of Kossan's total operatingcosts at 56%, will continue to track rubber price volatilities in themarket.
' Even though SMR20 grade bulk latex prices are on an upwardtrend since January 2012, we are not too concerned as the seasonal rubber trees'wintering season' typically sees less yield, thus lending support to higher rubberprices. We believe rubber prices would ease over the long term on the back ofexcess supply and weakening rubber demand from global automobile industry.
' Additionally, Kossan's strategic move into higher valued non-NRgloves, namely cleanroom variants, would serve to mitigate the group's earningsrisks over the long run. It aims to boost manufacturing of non-NR gloves from40% of its product mix to 50% by end-FY12F.
' The group's expansion plans are on track, with additional capacitiesto drive earnings growth moving forward. Total installed capacity is set torise by 2.5 billion pieces by July FY12F, and a further 2 billion pieces bynext year. All in, the additional lines will bring the group's installedcapacity to a total of 17 billion pieces per annum by end-FY13F.
' We maintain our BUYrating on Kossan with an unchanged fairvalue of RM4.31/share, based ona fair PE of 12.5x FY12F earnings. We continue to like the group for its less susceptibleearnings portfolio as underpinned by its more balanced product mix. Ourvaluation is a tad above the stock's10-year mean of 11x, but still at a 35% discount to industry leader Top GloveCorp's (TOPG Mk Equity, Buy) fair PE of 19x.
Source: AmeSecurities
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