Journey to Wealth
Kossan Rubber Industries - Showing signs of improvement
Period 3Q12/9MFY12
Actual vs. Expectations The 9-month revenue and net profit of RM916.9m and RM74.8m respectively were within the market expectations, which accounted for 74% and 71% of the consensus estimates. While showing signs of improvement, this set of results, however, only made up 78% and 66% of our forecasts.
Dividends Declared a tax exempt interim dividend of 5.0 sen per share of RM0.50 each for the financial year ending 31 December 2012. This dividend payment is higher than last year's tax exempt interim dividend of 3.0 sen.
Key Result Highlights QoQ, the revenue increased by 5.9% due to the increased in the production output of gloves. The net profit meanwhile rose a higher 23.7% due to lower material prices (for instance, latex price declined from RM6.88 to RM6.05) and an increased capacity utilisation. Collectively, the net profit margin has further expanded to 9.1% from 7.8%.
YoY, the revenue and net profit increased by 15.9% and 23.6% respectively. Apart from the aforementioned reasons, the improved profitability (net margin grew from 8.5% to 9.1%) was also attributed to a greater demand owing to the lower commodities price i.e. latex and nitrite prices.
For the YTD, the revenue and net profit grew 13.1% and 10.9% respectively YoY due to the abovementioned reasons.
Outlook We believe KOSSAN should deliver a better set of results going forward driven by factors such as (i) a stronger demand, (ii) better product mix, (iii) additional capacity (its new surgical gloves production line is expected to start production in January 2013) and (iv) with management expecting the clean-room division to show profits. However, the momentum of improvement is somewhat below our expectations.
Change to Forecasts As such, we are revising our FY12 and FY13 earnings forecasts from RM113.5m and RM122.7m to RM105.7m and RM116.4m respectively, representing downward revisions of 6.9% and 5.1% respectively. The lower revenue forecast is due to the lower average selling prices ('ASPs'), which is in line with the lower raw materials cost.
Rating We are maintaining our OUTPERFORM call and revised our target price higher to RM3.64 from RM3.38, despite our earnings estimates being marginally cut.
Valuation This is because KOSSAN's valuation is still relatively undemanding at 8.8x to our FY13 EPS estimate currently (even after our earnings revisions). By pegging our adjusted lower FY13 EPS forecast of 36.4 sen to a -0.5 standard deviation PER valuation of 10.0x, the stock should be valued at 3.64.
Risks Higher latex prices and a stronger ringgit.
Source: Kenanga
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