Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: RHB
Kossan Rubber Industries Bhd
(May 17, RM7.76)
Maintain outperform at RM7.77 with fair value of RM10.74: Kossan is due to announce its 1QFY10 results this week. We expect Kossan to post low double-digit year-on-year (y-o-y) revenue and net profit growth due to a combination of: 1) higher volume sales for the glove segment; 2) improved demand for its technical rubber products (TRP) as a result of the economic recovery; and 3) margin expansion due to the improvement in sales mix as more higher value gloves were sold during the quarter.
Quarter-on-quarter (q-o-q), we expect revenue growth of high single digit mainly on the back of: 1) upward adjustments to selling prices to pass on the higher raw material cost (latex price: +32.3% q-o-q), partly offset by the weakening of the US dollar against ringgit (-1.0% q-o-q); and 2) stronger demand for the TRP segment.
1QFY10 core earnings, however, could possibly remain flat q-o-q due to lower margins resulting from the usual time lag in passing on the higher raw material prices and weakening US dollar, partly offset by stronger performance from the TRP segment.
Capacity expansion at its new factory in Jalan Meru is ongoing, and upon completion, it will house a total of 32 double-former lines. This factory currently houses eight double-former lines, which started commercial production in October 2009. In total, Kossan's annual production capacity would increase by 20.8% from 12 billion pieces currently to 14.5 billion pieces by end-2010 and further by 24.1% to 18 billion pieces by end-2011.
Although these 32 double-former lines are capable of producing both synthetic and natural rubber gloves, they will focus on the production of powdered natural rubber medical gloves to cater for demand from emerging markets such as China and India.
The risks to our view include: 1) sharp surge in raw material (latex) prices, which may result in margin squeeze; 2) an appreciating ringgit against the US dollar; and 3) execution risk from capacity expansion.
We are keeping our FY10-12 earnings forecasts unchanged for now. We maintain both our fair value of RM10.74, which is based on target CY10 PER (price-earnings ratio) of 13 times, and outperform call on the stock. ' RHB Research Institute, May 17
This article appeared in The Edge Financial Daily, May 18, 2010.
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: RHB
Kossan Rubber Industries Bhd
(May 17, RM7.76)
Maintain outperform at RM7.77 with fair value of RM10.74: Kossan is due to announce its 1QFY10 results this week. We expect Kossan to post low double-digit year-on-year (y-o-y) revenue and net profit growth due to a combination of: 1) higher volume sales for the glove segment; 2) improved demand for its technical rubber products (TRP) as a result of the economic recovery; and 3) margin expansion due to the improvement in sales mix as more higher value gloves were sold during the quarter.
Quarter-on-quarter (q-o-q), we expect revenue growth of high single digit mainly on the back of: 1) upward adjustments to selling prices to pass on the higher raw material cost (latex price: +32.3% q-o-q), partly offset by the weakening of the US dollar against ringgit (-1.0% q-o-q); and 2) stronger demand for the TRP segment.
1QFY10 core earnings, however, could possibly remain flat q-o-q due to lower margins resulting from the usual time lag in passing on the higher raw material prices and weakening US dollar, partly offset by stronger performance from the TRP segment.
Capacity expansion at its new factory in Jalan Meru is ongoing, and upon completion, it will house a total of 32 double-former lines. This factory currently houses eight double-former lines, which started commercial production in October 2009. In total, Kossan's annual production capacity would increase by 20.8% from 12 billion pieces currently to 14.5 billion pieces by end-2010 and further by 24.1% to 18 billion pieces by end-2011.
Although these 32 double-former lines are capable of producing both synthetic and natural rubber gloves, they will focus on the production of powdered natural rubber medical gloves to cater for demand from emerging markets such as China and India.
The risks to our view include: 1) sharp surge in raw material (latex) prices, which may result in margin squeeze; 2) an appreciating ringgit against the US dollar; and 3) execution risk from capacity expansion.
We are keeping our FY10-12 earnings forecasts unchanged for now. We maintain both our fair value of RM10.74, which is based on target CY10 PER (price-earnings ratio) of 13 times, and outperform call on the stock. ' RHB Research Institute, May 17
This article appeared in The Edge Financial Daily, May 18, 2010.
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