Kossan  posted  commendable  1HFY13  results  which  were  in  line  with our  estimates,  mainly attributed to the company’s higher  production efficiency. This was in turn driven by improved automation at its plants. In view of current market conditions, we are revising our assumptions. Maintain BUY on the stock, with a higher FV of MYR7.53, pegged to an unchanged 14x FY14 P/E.

- Commendable  1HFY13  results.  Kossan  recently  announced  solid 1HFY13  results  with  a  core  net  profit  of  MYR66.6m  (+46.2%  y-o-y), which  came  in  line  at  50%  of  our  full-year  forecast.  The  strong  growth was  attributed to the company’s higher production efficiency,  driven  by increased automation at its plants.  

- Tweaking  estimates.  Given  the  strengthening  USD/MYR,  we  are revisiting  our  model  and  revising  our  FX  assumption  to  MYR3.20  (from MYR3.10)  for  both  FY13  and  FY14.  We  are  also  factoring  in  higher logistics  costs  given  the  recent  hike  in  petrol  prices.  We  now  estimate earnings of MYR144.5m and MYR172.6m for FY13 and FY14, up 8.4% and 2.1% from our previous forecasts respectively. 

- 1-for-1 bonus issue. On 2 Sept, Kossan proposed a 1-for-1 bonus issue of  up  to  319.7m  bonus  shares,  which  would  increase  its  share  base  to 639.5m.  Our  new  FV  now  stands  at  MYR7.53  (from  MYR7.38),  which implies our ex-bonus FV would now be reduced to MYR3.78. We believe that  the  exercise  will  improve  trading  sentiment  by boosting the stock’s liquidity. 

- Maintain  BUY.  All  in  all,  we  continue  to  like Kossan’s 50:50 production mix of natural latex and nitrile gloves as well as its increasing expansion in  the  nitrile  segment.  We  maintain  our  BUY  recommendation  on  the stock as we bump up our FV to MYR7.53, premised on a 14x FY14 P/E. This  is  a  premium  to  the  12-month  average  P/E  of  about  11x  that  is deserved,  in  our  opinion,  due  to  strong  earnings  growth  and  widening margins. 

Source: RHB