Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: BIMB
Kossan Rubber Industries Bhd
(Jan 25, RM3.18)
Maintain buy with target price RM4.28: Kossan recorded a significantly higher revenue and net profit for 9MFY10 compared with the same period in FY09.
Revenue surged by 30% year-on-year while net profit rose even more strongly, jumping 54% year-on-year (y-o-y) to RM41.3 million from RM26.8 million recorded in 9MFY09. The higher net profit and revenue were lifted by higher sales volume and selling price, in tandem with the higher latex price and weaker US dollar against the ringgit. In addition, a good strategic move by the company to focus more on better margin products (such as nitrile gloves) has benefited its bottom line as the current cost for nitrile is more stable than the cost of latex which skyrocketed in 2010.
Kossan recorded an impressive 90% to 95% utilisation rate in FY05 to FY09 thanks to its strategy of supplying rubber gloves at optimum level. Thus, we foresee the company will benefit from any normalising of demand in the glove industry. Admittedly, there have been some oversupply issues as a result of normalising demand as distributors increased their inventory during the'' H1N1 influenza A outbreak last year. However, we believe demand will keep growing in the coming years. Thus, Kossan is aiming to add more production lines, a growth of 10% to 30% for FY11 and FY12. This will help the company to cater for the rising global demand that is expected to grow by 8% to 10% in FY10/FY12.
Other than the gloves division, the technical rubber products (TRPs) division has contributed to Kossan's earnings. This segment contributes about 20% of the group's annual revenue. For the cumulative 9MFY10 period, this division contributed RM5.9 million (against RM1.6 million in 9MFY09) to its bottom line as demand from industrial sectors has shown encouraging improvement recently. This segment will benefit from the turnaround in the auto sector, especially from the large exporting countries. Close to 60% of TRPs sales are meant for export while the remaining 40% are sold domestically.
With up to 99% focus on the medical sector, it is not surprising to learn that the nitrile gloves segment has been contributing around 80% of Kossan's total revenue. Currently, more than 40% of its production mix comes from nitrile and powder-free, with the balance 20% from the powdered latex gloves. The company will eventually increase its production mix to 50% nitrile gloves due to the low raw material cost compared with latex. In addition, the volatility of the latex price, especially for latex-based powdered and powder-free gloves, and the uncertain future latex price will drive customers to demand more nitrile gloves as the price is more stable. However, the company will still provide latex-based gloves as the demand for such gloves is higher than for nitrile gloves.
We are keeping our forecast unchanged as updates from management are largely in sync with our assumptions. We maintain our 'buy' call on this counter with target price of RM4.28 based on an unchanged target PER of 10 times (at a 10% discount to Kossans three-year average PER of 11 times) to FY11 EPS of 42.8 sen. We remain positive on the industry's demand side as this will be underpinned by: (i) the expected growth in the global demand for rubber gloves by 8% to 10% in FY10-FY12 on the back of resilient demand from the healthcare segment; and (ii) the expected liberalisation of the healthcare industry in major economies, especially China and India to be followed by other countries in the Americas, which would drive higher private healthcare spending. ' BIMB Securities Research, Jan 27
This article appeared in The Edge Financial Daily, January 28, 2011.
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: BIMB
Kossan Rubber Industries Bhd
(Jan 25, RM3.18)
Maintain buy with target price RM4.28: Kossan recorded a significantly higher revenue and net profit for 9MFY10 compared with the same period in FY09.
Revenue surged by 30% year-on-year while net profit rose even more strongly, jumping 54% year-on-year (y-o-y) to RM41.3 million from RM26.8 million recorded in 9MFY09. The higher net profit and revenue were lifted by higher sales volume and selling price, in tandem with the higher latex price and weaker US dollar against the ringgit. In addition, a good strategic move by the company to focus more on better margin products (such as nitrile gloves) has benefited its bottom line as the current cost for nitrile is more stable than the cost of latex which skyrocketed in 2010.
Kossan recorded an impressive 90% to 95% utilisation rate in FY05 to FY09 thanks to its strategy of supplying rubber gloves at optimum level. Thus, we foresee the company will benefit from any normalising of demand in the glove industry. Admittedly, there have been some oversupply issues as a result of normalising demand as distributors increased their inventory during the'' H1N1 influenza A outbreak last year. However, we believe demand will keep growing in the coming years. Thus, Kossan is aiming to add more production lines, a growth of 10% to 30% for FY11 and FY12. This will help the company to cater for the rising global demand that is expected to grow by 8% to 10% in FY10/FY12.
Other than the gloves division, the technical rubber products (TRPs) division has contributed to Kossan's earnings. This segment contributes about 20% of the group's annual revenue. For the cumulative 9MFY10 period, this division contributed RM5.9 million (against RM1.6 million in 9MFY09) to its bottom line as demand from industrial sectors has shown encouraging improvement recently. This segment will benefit from the turnaround in the auto sector, especially from the large exporting countries. Close to 60% of TRPs sales are meant for export while the remaining 40% are sold domestically.
With up to 99% focus on the medical sector, it is not surprising to learn that the nitrile gloves segment has been contributing around 80% of Kossan's total revenue. Currently, more than 40% of its production mix comes from nitrile and powder-free, with the balance 20% from the powdered latex gloves. The company will eventually increase its production mix to 50% nitrile gloves due to the low raw material cost compared with latex. In addition, the volatility of the latex price, especially for latex-based powdered and powder-free gloves, and the uncertain future latex price will drive customers to demand more nitrile gloves as the price is more stable. However, the company will still provide latex-based gloves as the demand for such gloves is higher than for nitrile gloves.
We are keeping our forecast unchanged as updates from management are largely in sync with our assumptions. We maintain our 'buy' call on this counter with target price of RM4.28 based on an unchanged target PER of 10 times (at a 10% discount to Kossans three-year average PER of 11 times) to FY11 EPS of 42.8 sen. We remain positive on the industry's demand side as this will be underpinned by: (i) the expected growth in the global demand for rubber gloves by 8% to 10% in FY10-FY12 on the back of resilient demand from the healthcare segment; and (ii) the expected liberalisation of the healthcare industry in major economies, especially China and India to be followed by other countries in the Americas, which would drive higher private healthcare spending. ' BIMB Securities Research, Jan 27
This article appeared in The Edge Financial Daily, January 28, 2011.
No comments:
Post a Comment