Kossan  posted  healthy  1QFY13  net  profit  of  MYR34.0m  that  was  well within  our  and  marginally  above  street  estimates,  making  up  26%  and 28%  of  the  annual  forecasts  respectively.  The  laudable  results  were attributed  to  higher  sales  and  better  production  efficiency,  which boosted  its  bottomline.  This,  and  following  a  reallocation  in  coverage, we maintain our BUY call on the stock, with a FV of MYR5.43, as we roll over our valuations to FY14, pegged to a 12x P/E.  

- Results  in  line.  Kossan’s 1QFY13 earnings  were  well  within  our  and slightly above consensus expectations, comprising 26% and 28% of both FY13  forecasts.  The  company  recorded  revenue  of  MYR327.3m,  which was up 2.7% q-o-q and 13.1% y-o-y, contributed by higher sales volume as  well  as  higher  production  capacity.  Correspondingly,  its  net  profit improved  14.6%  q-o-q  and  54.9%  y-o-y  to  MYR34.0m,  as  further automation at its factories boosted production efficiency. On a sequential basis,  Kossan’s  1QFY13  results  were  generally  attributed  to  easing prices of raw material prices such as natural rubber latex and nitrile.

- Capacity expansion enhances outlook. Kossan is looking to expand its production capacity from the current 16.0bn pieces to 20.0bn pieces p.a. by 2014. Management has indicated that it will concentrate more on the higher-end  surgical  and  nitrile  gloves  segment  moving  forward  as  these products give the company better pricing power and broader margins.  

- Maintain  BUY.  Following  an  internal  coverage  transition,  we  revamped our  financial  model  and  revised  our  assumptions  accordingly.  We  are now forecasting a net profit of MYR132.0m for FY13 and MYR145.0m for FY14.  We  continue  to  like  Kossan’s balanced  product  mix  of  50:50 comprising  natural  rubber  latex  and  nitrile  gloves,  which  allows  it  to  tap into both market segments. From these we derive a new FV of MYR5.43 as we roll over our valuations to FY14, based on a 12x target P/E (raised 
from 9x previously.)

Source: RHB