Kossan  posted  solid  1HFY13  core  earnings  of  MYR66.6m,  in  line  with our  and  consensus  full-year  estimates.  We  attribute  the  commendable results  to  the  increase  in  sales  volume  and  improved  production efficiency.  Come May 2014, Kossan’s annual production capacity is expected to increase by 31% to 22bn pieces. Maintain BUY, with our FV revised higher to MYR7.38 (from MYR5.43), pegged to a 14x FY14 P/E 
 
- Well  within  expectations.  Kossan’s  1HFY13  core  earnings  of MYR66.6m  were  within  our  and  consensus  expectations,  making  up 50%  and  52%  of  the  respective  full-year  FY13  forecasts.  This  was attributed  to  the  company’s  higher  production  efficiency  driven  by increased  automation.  On  a  quarterly  basis,  2QFY13  revenue  dipped 1.7% q-o-q while core earnings inched up 0.3% q-o-q, on better  gloves sales  partially  offset  by  the  weakness  in  the  technical  product  division.  Meanwhile,  PBT  in  the  clean-room  division  surged  80.7%  q-o-q,  mainly due to an increase in sales.

- Capacity  expansion  on  track.  We  gather  from  Management  that Kossan  will  be  expanding  production  capacity  by  building  three  new plants. Upon full completion, Kossan’s annual production capacity would increase by 31% to 22bn pieces from 16bn pieces currently. Its first plant is scheduled for completion by Dec 2013, while the remaining two plants by May 2014. Management has also indicated that it will concentrate on higher-end  surgical  and  nitrile  gloves  as  these  products  generally  fetch higher margins.  

- Raising estimates. Given the new guidance on its capacity expansion, we  are  raising  our  FY14F  net  profit  by  17.2%  to  MYR169m,  to incorporate the additional capacity in the pipeline.  

- Maintain BUY. We continue to like Kossan for its 50:50 production mix coupled  with  its  expansion  in  the  nitrile  glove  segment.  In  view  of  its potential earnings growth buoyed by rising production capacity, we raise our  FV  to  MYR7.38  (from  MYR5.43),  pegged  to  a  14x  FY14  P/E  (from 12x), based on its 10-year historical peak P/E of 14.5x.

Source: RHB