Stock Name: KOSSAN
Company Name: KOSSAN RUBBER INDUSTRIES BHD
Kossan Rubber Industries Bhd
(Aug 25, RM2.71)
Maintain hold at RM2.78 with revised fair value of RM3.54 (from RM3.71): We maintain our 'hold' rating on Kossan Rubber Industries but with a lower fair value of RM3.54 (RM3.71 previously), post 4%-16% downward earnings revisions on dismal 2QFY11 results.
Kossan's 2QFY11 net profit of RM21 million missed both our and market expectations. Net profit of RM44 million (year-on-year: -27%) at half-time accounted for only 38% of our full-year forecast and 37% of consensus.
The group posted a sequentially higher revenue for 2QFY11, up 8% quarter-on-quarter (q-o-q) on an upward revision to average selling price (ASP). However, volume of gloves sold declined to about two billion pieces versus an average of 2.2 billion previously, given the lack of a meaningful improvement in demand for natural rubber (NR) gloves. Production mix for NR is still a high of 57%, while the balance is in synthetic variants.
Further margin normalisation was seen this quarter, with earnings before interest, tax, depreciation and amortisation (Ebitda) margin declining 2.1 percentage points q-o-q to 13%. We suspect the business operating environment remains competitive with price undercutting activities rife, particularly within the basic NR glove segment.
The earnings underperformance mimics the trend seen in recent results of peers, underpinning our long-standing view that it may be too premature to turn constructive on the sector.
On the flipside, the group's strategy in focusing on better margin glove variants would reduce its exposure to latex price volatility. The group aims to boost production of synthetic gloves from 43% to about 60% moving forward. As it is, production mix of synthetic gloves as at August has increased to 50%. Synthetic gloves, namely nitrile variants, use butadiene as the main input.
All in, we cut our earnings forecasts by 16% for FY11F, and a smaller 3% to 4% for FY12F-13F, following lower margin assumptions, lower utilisation rates and revised latex prices. We are now projecting FY11F net profit to contract 15% year-on-year (y-o-y), before rebounding by 19% y-o-y in FY12F.
For exposure to the rubber gloves sector, we prefer Kossan for its more balanced product mix and cheap valuation. Current valuation is attractive, with the stock trading at a forward PE of 7.5 times. Our valuation continues to peg FY12F earnings to a fair PE of 10 times ' at a 30% discount to its 10-year mean. ' AmResearch, Aug 25
This article appeared in The Edge Financial Daily, August 26, 2011.
Company Name: KOSSAN RUBBER INDUSTRIES BHD
| Research House: AMMB | Price Call: HOLD | Target Price: 3.54 |
Kossan Rubber Industries Bhd
(Aug 25, RM2.71)
Maintain hold at RM2.78 with revised fair value of RM3.54 (from RM3.71): We maintain our 'hold' rating on Kossan Rubber Industries but with a lower fair value of RM3.54 (RM3.71 previously), post 4%-16% downward earnings revisions on dismal 2QFY11 results.
Kossan's 2QFY11 net profit of RM21 million missed both our and market expectations. Net profit of RM44 million (year-on-year: -27%) at half-time accounted for only 38% of our full-year forecast and 37% of consensus.
The group posted a sequentially higher revenue for 2QFY11, up 8% quarter-on-quarter (q-o-q) on an upward revision to average selling price (ASP). However, volume of gloves sold declined to about two billion pieces versus an average of 2.2 billion previously, given the lack of a meaningful improvement in demand for natural rubber (NR) gloves. Production mix for NR is still a high of 57%, while the balance is in synthetic variants.
Further margin normalisation was seen this quarter, with earnings before interest, tax, depreciation and amortisation (Ebitda) margin declining 2.1 percentage points q-o-q to 13%. We suspect the business operating environment remains competitive with price undercutting activities rife, particularly within the basic NR glove segment.
The earnings underperformance mimics the trend seen in recent results of peers, underpinning our long-standing view that it may be too premature to turn constructive on the sector.
On the flipside, the group's strategy in focusing on better margin glove variants would reduce its exposure to latex price volatility. The group aims to boost production of synthetic gloves from 43% to about 60% moving forward. As it is, production mix of synthetic gloves as at August has increased to 50%. Synthetic gloves, namely nitrile variants, use butadiene as the main input.
All in, we cut our earnings forecasts by 16% for FY11F, and a smaller 3% to 4% for FY12F-13F, following lower margin assumptions, lower utilisation rates and revised latex prices. We are now projecting FY11F net profit to contract 15% year-on-year (y-o-y), before rebounding by 19% y-o-y in FY12F.
For exposure to the rubber gloves sector, we prefer Kossan for its more balanced product mix and cheap valuation. Current valuation is attractive, with the stock trading at a forward PE of 7.5 times. Our valuation continues to peg FY12F earnings to a fair PE of 10 times ' at a 30% discount to its 10-year mean. ' AmResearch, Aug 25
This article appeared in The Edge Financial Daily, August 26, 2011.
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