Kossan‟s results and share price performance continue to reflect its sustained growth momentum. To capture the Group‟s positive performance, we are revising our TP upwards to RM4.73 from RM3.61 premised on i) change in gradual product mix from natural rubber latex (NR) to nitrile (SR), whereby SR margins are higher, and ii) increase in dividend payout expected in tandem with higher earnings, thus factored in gradual step up from 45% (FY14F) to 50% (FY15F). Using our dividend discount model (DDM), our new TP reflects a 14.3x PER which we believe is reasonable. We believe Kossan‟s Outperform recommendation will be buoyed by i) continuing increase in capacity expansion to c.26bn gloves by 2017 expanding on its nitrile offering and ii) improved product efficiency through R & D which has proven to improve its bottom-line margins illustrated in 3QFY13‟s results.

Gloves. Revenue may continue to face issues of lower selling price from lower raw material price, however the change of product variants should sustain and gradually improve margins. The Group‟s efforts of strategically improving product efficiency and product mix to aid in the growth of earnings has proven to offset any top-line hindrances.

Clean-room gloves. Will support Kossan‟s gloves growth from better utilisation of newly-installed facilities which resulted in higher revenue. PBT for this division also improved as of 3QFY13 from a loss in the preceding year‟s corresponding quarter from higher efficiency and cost control. We assume this trend will carry on positively.

Technical rubber products (TRP), has successfully tapped into the infrastructure and automotive products segment, reflected through increased sales from these product types. The commissioning of Kossan‟s TRP plant in Indonesia by 4QFY14 to cater for automotive industry products including panels, rubber engine guards, etc. would boost its revenue contribution further from current c.10%, from what we understand.

Increasing nitrile offering for higher margins. The Group‟s product mix currently consists of 55% synthetic rubber (nitrile) and 45% natural rubber (latex). Going forward the Group aims to target an 80% SR and 20% NR ratio production, as SR gloves yield better margins.

Outperform at TP of RM4.73. Our revised TP reflects the Group‟s growth momentum coupled with results materialisation of its strategies, this we deem is deserving of our new valuation. Remaining conservative, our forecast only considers a 80% capacity utilisation rate, whereas the company‟s actual utilisation is operating c.90%.

Source: PublicInvest Research - 20 Dec 2013