Results

4QFY12 net profit of RM29.7m (+1.5% qoq, +24.4% yoy) which brought FY12 to RM107.2m (+14.3% yoy) was in line with our expectations, accounting for 99.0% and 103.3% of our and consensus full-year estimates respectively.

Deviations

In line.

Highlights

4Q12 revenue grew resiliently at 13.2% yoy to RM318.6m, elevated FY12 sales to RM1,235.5m (+13.1%) mainly contributed by glove products where increased capacity utilization resulted in higher production output. However, qoq sales contracted marginally at 1.3% attributed to seasonality factor in conjunction with year-end holiday.

In the glove division, Kossan foresees that demand will continue to grow as health standard and awareness of protection improves from both developed and emerging countries. In turn, capacity will be further expanded to produce more latex and nitrile gloves and product mix will be optimised to maximize profitability.

The new surgical plant with an installed capacity of 350m pairs of surgical gloves, which has commenced operations, is expected to contribute positively.

To increase productivity, Kossan continues to improve the existing annual installed production capacity of 15bn pieces through R&D, improved processes and efficient design of plant to increase speed of production.

Risks

Spike in latex prices.

Weaker USD against the MYR.

Delays in capacity expansion plans, causing a hold back in capturing oncoming glove demand.

Forecasts

Largely unchanged.

Rating

HOLD

• Positives – Balanced 50:50 product mix of nitrile and natural rubber gloves will allow it to cater to both markets and mitigate risks from sudden price hikes in either nitrile or NR latex.
• Negatives – We believe Kossan has been a sector laggard due to its lack of specialization (of being predominantly a nitrile, NR, or OBM glove player).

Valuation

Target price maintained at RM3.19 based on unchanged 8.5x FY13 EPS of 37.5 sen. Unless more main catalysts for the sector comes into play, we believe Kossan will continue to trade around its 5-year historical FD PER of around 8.5x.

We do note that our valuation for Kossan is low compared to the recent M&As (Latexx Partners and Adventa) that valued those companies around PERs of 10-12x. We believe such valuations for Kossan will only be valid if it receives a similar takeover offer. However we do not see any reasons for this to happen in the near future.

Source: Hong Leong Investment Bank Research - 26 Feb 2013