KOSSAN (7153) : Kossan Rubber Industries - Non-core punctures 3Q
Target RM5.26 (Stock Rating: ADD)
At 65% of our full-year forecast, Kossan’s 9MFY14 results was below our and consensus’ expectations, mainly due to weaker performances from the technical-rubber, clean-room units and the delay in the commencement of plant one. While 9M revenue fell 4.5% mainly on lower glove selling prices, net profit was flat due to better product mix and higher operating efficiency from the gloves division. We cut our FY15 earnings by 7.2% to factor in the delay and higher opex. Our target price (still based on a 10% discount to Hartalega’s target P/E) is higher as we lift Hartalega’s P/E which is based on a higher target market P/E. Kossan has consistently been delivering better earnings than its peers but still trades below the sector’s 16.6x CY16 P/E average. Maintain Add. Its DPS of 3.5 sen is in line with our forecast.
9M net profit flat impacted by higher operating cost in 3Q
Kossan’s 9MFY14 revenue dropped 4.5% yoy but core net profit was flat (+0.7% yoy). The lower revenue was mainly due to the lower selling prices of its rubber gloves which declined in tandem with the lower raw material prices. Despite the production disruption from staggered conversions of powdered natural latex gloves to produce powder-free nitrile gloves in 1Q and state-wide powder-free water rationing in April which affected one of its plants in Klang, the group’s 9MFY14 sales volume was stronger yoy as its five new production lines started running in full capacity in 3Q (+5.5% in 3Q yoy). Sales of the technical rubber division (TRD) dropped 1.7% yoy due to the weak sales in 3Q (-21.3%) on the back of lower export of industrial and automotive parts. Sales of infrastructural products, marine and dock fenders remained strong. The cleanroom division’s revenue increased 26.6%. Despite the weaker EBITDA margin (-0.5% pts yoy) in 3Q due to weaker profitability from TRD (due to lower sales) and clean-room divisions (due to higher expansion and professional “trademark” fees), 9M’s EBITDA margin widened 1.1% pts yoy, thanks to better margins from the glove division (PBT margin, +0.2% pts yoy).
Looking forward to better performance
TRD and clean-room divisions are expected to improve going forward as new projects kick off and new products are launched. We expect Kossan to deliver a stronger 4Q as more new capacities come on-stream. The company has secured a large order and is confident of filling up the extra capacity.
Source: CIMB Daybreak - 21 November 2014
Target RM5.26 (Stock Rating: ADD)
At 65% of our full-year forecast, Kossan’s 9MFY14 results was below our and consensus’ expectations, mainly due to weaker performances from the technical-rubber, clean-room units and the delay in the commencement of plant one. While 9M revenue fell 4.5% mainly on lower glove selling prices, net profit was flat due to better product mix and higher operating efficiency from the gloves division. We cut our FY15 earnings by 7.2% to factor in the delay and higher opex. Our target price (still based on a 10% discount to Hartalega’s target P/E) is higher as we lift Hartalega’s P/E which is based on a higher target market P/E. Kossan has consistently been delivering better earnings than its peers but still trades below the sector’s 16.6x CY16 P/E average. Maintain Add. Its DPS of 3.5 sen is in line with our forecast.
9M net profit flat impacted by higher operating cost in 3Q
Kossan’s 9MFY14 revenue dropped 4.5% yoy but core net profit was flat (+0.7% yoy). The lower revenue was mainly due to the lower selling prices of its rubber gloves which declined in tandem with the lower raw material prices. Despite the production disruption from staggered conversions of powdered natural latex gloves to produce powder-free nitrile gloves in 1Q and state-wide powder-free water rationing in April which affected one of its plants in Klang, the group’s 9MFY14 sales volume was stronger yoy as its five new production lines started running in full capacity in 3Q (+5.5% in 3Q yoy). Sales of the technical rubber division (TRD) dropped 1.7% yoy due to the weak sales in 3Q (-21.3%) on the back of lower export of industrial and automotive parts. Sales of infrastructural products, marine and dock fenders remained strong. The cleanroom division’s revenue increased 26.6%. Despite the weaker EBITDA margin (-0.5% pts yoy) in 3Q due to weaker profitability from TRD (due to lower sales) and clean-room divisions (due to higher expansion and professional “trademark” fees), 9M’s EBITDA margin widened 1.1% pts yoy, thanks to better margins from the glove division (PBT margin, +0.2% pts yoy).
Looking forward to better performance
TRD and clean-room divisions are expected to improve going forward as new projects kick off and new products are launched. We expect Kossan to deliver a stronger 4Q as more new capacities come on-stream. The company has secured a large order and is confident of filling up the extra capacity.
Source: CIMB Daybreak - 21 November 2014
