Period  4Q13/12M13

Actual vs. Expectations Kossan Rubber Industries (KRI)’s FY13 net profit of RM140.6m (+38% YoY) came in within expectations of both our estimate and market consensus.

Dividends  No dividend was declared during the quarter.

Key Result Highlights Sequentially, 4Q13 revenue came in 2% lower to RM327m as utilisation rose to 85% and volume sales hit close to full capacity but was negated by lower average selling price. However, 4Q13 pre-tax profit fell faster by 4% to RM46m, impacted by an unrealized loss provision for foreign exchange derivatives and year-end translations amounting to RM2.8m. This brings 4Q13 net profit to RM38.6m (+9% QoQ) boosted by a lower effective tax rate of 14% compared to 23% in 3Q13 due to the availability of tax incentives.

 YoY, FY13 revenue rose 6% to RM1.3bn driven by capacity expansion in its gloves division which led to a higher sales volume (+21%) and solid contribution from the TRP division (+12%). Net profit grew faster than the turnover due to margins expansion driven by the lower average latex input price, efficiency improvement from automation, economies of scale from capacity expansion, and a lower effective tax rate which catapulted FY13 net profit higher by 37% to RM140.6m.

Outlook  Going forward, Kossan plans to build new production lines once its capacity utilisation hit 80% instead of 90% as in the past. This strategy will provide Kossan with the spare capacity to capitalise on potential new sale enquiries as well as meeting specific requirement needs from clients. It plans to build three new plants are on track for the manufacturing of nitrile gloves, which are expected to boost its capacity by additional 5b pieces of gloves or 31% of current capacity, bringing its total installed capacity to 21b pieces p.a.. The first plant with an estimated installed capacity of 1.5b-1.8b pieces of gloves is currently under trial run and expected to be commercially ready by end 1Q14 and the remaining two by May 2014.

Change to Forecasts No changes to our FY14 and FY15 forecasts.

Rating & Valuation Maintain our OUTPERFORM call. However, we are raising our TP by 15% from RM4.46 to RM5.13 as we roll forward our 12-month TP valuation from 16x FY14 EPS to 16x FY15 EPS.

 We like Kossan because: (i) of its superior net profit growth of 26% and 16% in FY14E and FY15E, respectively compared to the average of 15% and 12% for Top Glove and Hartalega, respectively, (ii) Kossan’s unprecedented earnings growth over the next two years underpinned by rapid capacity expansion, and (iii) the fact that Kossan is not just a rubber glove play but a bet on its TRP division, which has grown steadily over the past few quarters.

Risks to Our Call Delay in commissioning of new production lines.

Source: Kenanga