Period  4Q12/FY12

Actual vs. Expectations  The reported FY12 net profit of RM104.5m came in within expectations at 101% and 99.2% of ours and the consensus full-year earnings estimates.

Dividends  No dividend was declared during the quarter.

Key Result Highlights    QoQ, 4QFY12 revenue came in at RM318.6m (1.3%) due to (i) the weaker rubber gloves division (-1.2%) and technical rubber products (TRP) division (-4.1%) earnings being negated by cleanroom gloves (+15%). We gather that volume sales were relatively flat QoQ as the new capacity expansion has been taken up. Sequentially, 4QFY12 net profit came in at RM29.7m (+1.5% qoq) due to a higher pre-tax profit contribution from the TRP division (+25%) but this was offset by lower contribution from the gloves division (-3.5%) and a higher effective tax rate. The cleanroom gloves division recorded a small pre-tax profit of RM0.8m after recording losses in the past 2-3 quarters due to the start-up costs incurred. The EBITDA margin expanded slightly at 17.0% compared to 16.2% in 3QFY12 as the average input latex raw material cost fell 5.0% to 5.88/kg qoq.

 YoY, the group's FY12 revenue rose 13% to RM1.2b contributed by (i) the technical rubber products division (+9%) driven by its increased sales volume of higher valued infrastructure products and new projects; and (ii) the gloves division (+13%) due largely to a higher sales volume which more than offset its lower ASPs. Net profit grew faster than turnover growth due to margins expansion from the collapse in the input raw material price. The average input latex price decline 25% YoY in FY12.

Outlook  The commercial operation of its new production lines is expected to contribute to the earnings growth in 2013. We understand that the nine-line production plant, which is set to produce 1.3b nitrile gloves p.a., is now commercially ready. The production line to produce 0.6b pieces of surgical gloves is expected to be ready by end-Feb 2013. Kossan has managed to secure buyers for more than 85% of the new capacity.

Change to Forecasts  No changes to our FY13 and FY14 forecasts.

Rating   Maintain our OUTPERFORM call and target price of RM3.64 based on 10x FY13 EPS, representing a -0.5 standard deviation below the 6-year average.

Valuation  Kossan is trading at 9.0x FY13 earnings compared to Topglove and Hartalega, which are at 15.0x of their FY13 earnings. The valuation gap should narrow as Kossan moves up the value chain by offering higher margin surgical and clean room gloves. Going by previous acquisitions of both Adventa and Latexx Partner at PERs of between 13.0x and 16.0x, Kossan appears more attractive at its current valuation, judging from its higher market capitalisation as well as earnings base.

Risks  Higher than expected input raw material cost.

 Lower than expected volume sales.

Source: Kenanga