Period     1QFY13

Actual vs.  Expectations     The reported 1QFY13 net profit of RM33.2m (+51% YoY) came in within expectations at 27% of ours and that of the consensus full-year earnings estimates. 

Dividends    No dividend was declared during the quarter. 

Key Result Highlights      QoQ, the 1QFY13 revenue came in at RM327m (+2.7%) driven largely by its rubber gloves division (+3.0%) as volume sales grew 2% with its new capacity expansion taken up. Sequentially, the 1QFY13 net profit came in at RM33.2m (+12% QoQ) due to a higher pre-tax profit contribution from the gloves division (+19.7%) and  a lower effective tax rate, which more than offset the lower contribution from the technical rubber product (TRP) division (-36.7%). The EBITDA margin expanded slightly at 18.1% compared to 17.0% in 4QFY12 despite the implementation of the minimum wage policy. This meant that Kossan was able to pass the higher cost through, which mitigated the effect of the minimum wage policy. However, in the TRP division, the PBT margin here fell to 12% QoQ from 19% as some jobs had already been contracted prior to the implementation of the minimum wage policy and involved a longer contracted period where the higher cost was not able to be passed on immediately. 

  YoY,  the group’s 1QFY13 revenue rose 13% to RM1.2b contributed by: (i) its technical rubber products division (+6.0%) and (ii) its gloves division (+13.9%) due largely to a higher sales volume (+23%), which more than offset the lower ASPs made. Net profit grew faster than the turnover growth due to margins expansion as a result of the 18% decrease in the average latex input price.

Outlook    Going forward, Kossan is building new lines once its capacity utilisation hit 80% instead of 90% in the  past. This strategy will allow Kossan to have spare capacity in order to capitalise on potential new enquiries as well as for the specific requirement needs from its clients.  Plans to build two new plants are on track targeting nitrile gloves, which are expected to boost its capacity by an additional 2.2b to 2.4b pieces of gloves or 16%, bringing its  total installed capacity to 17.2b pieces p.a. The first and second plants are expected to be completed by 1HFY2014 and 3Q2014 respectively. 

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

Rating  Maintaining our  OUTPERFORM call and target price of RM4.88 based on 11x FY14 EPS (+0.5 standard deviation above the 6-year forward average PER).

Valuation     We like Kossan because (1) its valuations are undemanding with the stock trading at just 9.1x its CY14 EPS or at a 38% discount to its larger peers like Top Glove’s 14.2x and Hartalega’s 13.9x for CY14, (2) it is gradually raising its dividend payout ratio (Kossan recently declared a final seven sen tax-exempt dividend. This brought its total full-year FY12 DPS to 12.5 sen, implying a 38% payout ratio – well ahead of its <20% payout ratios in the past three years, and (3) the fact that Kossan is not just a rubber glove play but a bet on its TRP division, which is growing strongly at a rate of >20% QoQ at the pre-tax profit level over the past few quarters. 

Risks    Lower than expected volume sales.

Source: Kenanga