Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: MAYBANK
Kossan Rubber Industries Bhd
(Feb 22, RM3.18)
Maintain buy at RM3.29 with target price RM3.60: Kossan's 4Q earnings are likely to have been stable quarter-on-quarter (+17% year-on-year) on sustained earnings before interest and tax (Ebit) margins. Such a performance would be highly commendable in our view, considering the fact that high latex prices have negatively impacted the margins and earnings of its latex peers in the recent quarter. Latex gloves presently account for 60% of Kossan's glove production with nitrile accounting for the remaining 40%. Kossan's share price has unjustifiably underperformed the bigger latex peers by 5% year-to-date and valuations are undemanding. We maintain our 'buy' call and discounted cash flow-derived target price of RM3.60.
The 4Q10 results are set to be released on Feb 23. We expect net profit to come in at RM28 million (flattish q-o-q, +17% y-o-y), slightly below our expectations but in line with consensus. We estimate sales volume in the quarter to have dipped 4% q-o-q to 2.2 billion pieces, due to the conversion of lines to nitrile production during the period ' production yield per line for nitrile is 20% lower than latex. Bottom line, nevertheless, has effectively been protected by higher margins for these gloves.
While most local glovemakers are rushing into producing more medical nitrile gloves, Kossan plans to produce more speciality nitrile gloves where the barriers to entry are higher. The 16 lines (1.6 billion pieces or +10% to previous total capacity), which have been up and running since January 2011, are dedicated to this speciality glove segment. This diversification would provide some buffer to volatile latex prices over the longer term. We expect nitrile to account for 50% of Kossan's product mix in 2011.
We maintain our forecasts, expecting 10% earnings per share growth in 2011 and 8% in 2012, underpinned by its speciality glove production and the completion of its eight new nitrile lines in 2Q12 (converting from six latex powdered glove lines). At our DCF-derived target price of RM3.60, Kossan would trade at eight times 2012 PER, against Top Glove's 14 times and Hartalega's 10 times. ' Maybank IB Research, Feb 22
This article appeared in The Edge Financial Daily, February 23, 2011.
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Research House: MAYBANK
Kossan Rubber Industries Bhd
(Feb 22, RM3.18)
Maintain buy at RM3.29 with target price RM3.60: Kossan's 4Q earnings are likely to have been stable quarter-on-quarter (+17% year-on-year) on sustained earnings before interest and tax (Ebit) margins. Such a performance would be highly commendable in our view, considering the fact that high latex prices have negatively impacted the margins and earnings of its latex peers in the recent quarter. Latex gloves presently account for 60% of Kossan's glove production with nitrile accounting for the remaining 40%. Kossan's share price has unjustifiably underperformed the bigger latex peers by 5% year-to-date and valuations are undemanding. We maintain our 'buy' call and discounted cash flow-derived target price of RM3.60.
The 4Q10 results are set to be released on Feb 23. We expect net profit to come in at RM28 million (flattish q-o-q, +17% y-o-y), slightly below our expectations but in line with consensus. We estimate sales volume in the quarter to have dipped 4% q-o-q to 2.2 billion pieces, due to the conversion of lines to nitrile production during the period ' production yield per line for nitrile is 20% lower than latex. Bottom line, nevertheless, has effectively been protected by higher margins for these gloves.
While most local glovemakers are rushing into producing more medical nitrile gloves, Kossan plans to produce more speciality nitrile gloves where the barriers to entry are higher. The 16 lines (1.6 billion pieces or +10% to previous total capacity), which have been up and running since January 2011, are dedicated to this speciality glove segment. This diversification would provide some buffer to volatile latex prices over the longer term. We expect nitrile to account for 50% of Kossan's product mix in 2011.
We maintain our forecasts, expecting 10% earnings per share growth in 2011 and 8% in 2012, underpinned by its speciality glove production and the completion of its eight new nitrile lines in 2Q12 (converting from six latex powdered glove lines). At our DCF-derived target price of RM3.60, Kossan would trade at eight times 2012 PER, against Top Glove's 14 times and Hartalega's 10 times. ' Maybank IB Research, Feb 22
This article appeared in The Edge Financial Daily, February 23, 2011.
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