alliance kossan 3q2012

7/27/2019 Alliance Kossan 3Q2012

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PP13693/03/2013(032114)

A solid 3QFY12 results9MFY12 net profit of RM74.8m (+11% y-o-y) was 66% and 71% of our and consensus

full-year forecasts respectively. We consider the results to be within expectation as

we expect earnings to ramp up further from 4Q 2012 onwards driven by new capacity

expansion and the lower-than-expected raw material latex price. We like Kossan

because of: (i) its undemanding valuations. Kossan is trading at 9x FY12 EPS compared

to Top Gloves 20x; (ii) The company is moving up the value chain by offering higher

margin surgical and clean room gloves; and (iii) its product mix of less natural rubber

glove which is sensitive to movements in latex price. Maintain Buy and a target price

of RM4.66 based on 11x FY13 EPS.

Results highlights Sequentially, 3QFY12 revenue came in at RM322m (+6%) led by (i) rubber gloves

division (+7%) and cleanroom gloves (+28%). Overall volume sales rose

approximately between 12% and 15% on the back of new capacity expansion.

This brings 3QFY12 net profit to RM29m (+24%) due to pre-tax profit contributionfrom the technical rubber products and gloves divisions of 25% and 28%,

respectively which more than offset the start-up losses of the clean room product

division (-RM0.1m) and a higher effective tax rate. The solid results were further

strengthened by a lower average input raw material cost (latex), which led to an

increase in 2Q EBITDA margin which rose 2 ppts to 16%.

A 5 sen tax exempt dividend was declared, which will go ex-dividend on 6 Dec 2012.Outlook

New capacity with secured buyers. Commercial operations of the new productionlines are expected to contribute to earnings growth in subsequent quarters and in

2013. We understand that the nine-line production plant which is set to produce

1.3bn nitrile gloves pa is commercially ready. The production lines for the remaining

balance of 700m surgical gloves are expected to be completed by Jan 2013. The

new capacity would increase output by 2bn gloves to 14bn. Kossan has managed to

secure buyers for more than 85% of the new capacity.

Management expects the clean room gloves division to break even in FY12.Impact on valuation and recommendation Maintain Buy with a target price of RM4.66 based on 11x FY13 EPS. We like Kossan

because of: (i) its undemanding valuations. Kossan is trading at 9x FY12 EPS

compared to Top Gloves 20x FY12 EPS. (ii) The company is moving up the value

chain by offering higher margin surgical and clean room gloves; and (iii) its product

mix contains less natural rubber glove which is sensitive to movements in latex

price.

Key risks to our earnings forecast includes: (i) higher-than-expected natural latexprice; and (ii) lower-than-expected sales volume.

Results Review 23 November 2012

Kossan Rubber IndustriesGLOVE

BuyBloomberg Ticker: KRI MK | Bursa Code: 7153

12-month upside potential

Target price 4.66Current price 3.19

Capital upside (%) 41.5

Net dividends (%) 2.2

Total return (%) 43.7

Key stock statistics

Market cap (RM m) 1020

Issued shares (m) 320

Free float (%) 36

Share price performance52-week range (RM) 2.98 3.65

3-mth avg volume (000) 261.5

3-mth avg turnover (RM m) 0.8

1M 3M 6M

Absolute (%) 2.9 -2.4 2.9

Relative (%) 5.8 -0.7 -1.4

Share price chart

Key financial data

FY Dec FY10 FY11 FY12F FY13F

EPS (sen) 35.5 28.6 36.6 42.4

P/E (x) 9.0 11.2 8.7 7.5Net DPS (sen) 10.0 10.0 7.0 7.0

Div yield (%) 3.1 2.2 2.2 2.2

BVPS (RM) 1.38 1.56 1.89 2.27

P/B (x) 2.3 2.1 1.7 1.4

Team Coverage

[email protected]

+603 2089 2990


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Kossan Rubber Industries | A solid 3QFY12 results| 23 November 2012 2

Figure 1 : Earnings Review YTD

FY Dec 2011 2012 Y-o-Y Comments

(RMm) 9M 9M Chg (%)

Turnover 810.6 916.9 13.1 Improvement across the board contributed mainly by (i) technical rubber products

division (+12%) driven by increased sales volume of higher valued infrastructure

products and new projects; and (ii) gloves division (+12%) due largely to higher

sales volume which more than offset the lower ASPs.

EBITDA 120.8 137.0 13.4 Due to lower input latex price.

Depreciation (29.4) (32.6) 10.9

Finance cost (5.7) (4.7) (18.0)

Pretax profit 85.7 99.7 16.4 Technical rubber products and Gloves division pre-tax rose 65% and 12%,

respectively. These have more than offset the start-up losses of RM0.7m at the

clean room product division.

Taxation (17.0) (23.2) 36.5

Minority interest (1.1) (1.8) 52.7

Net profit 67.5 74.8 10.7 Filtered down from pre-tax profit but dragged down by a higher effective tax rate.

EPS (sen) 21.1 23.4 10.7

EBITDA margin (%) 15 15

Pretax margin (%) 11 11

Effective tax rate (%) 20 23

Source: ECM Libra, Bursa Malaysia

Figure 2 : Earnings Review quarterly (Q-o-Q)

FY Dec 2012 2012 2012 Q-o-Q Comments

(RMm) 1Q 2Q 3Q Chg (%)

Turnover 289.4 304.8 322.7 5.9 Improvement across the board contributed mainly by (i) rubber glovesdivision (+7%) and cleanroom gloves (+28%). Overall volume sales rose

approximately 12% on the back of new capacity expansion.

EBITDA 41.1 43.6 52.3 20.0 Due to lower input latex price and the lag effect in passing on cost saving to

customers.

Depreciation (10.8) (11.0) (10.8) (1.3)

Finance cost (1.6) (1.5) (1.5) (2.8)

Pretax profit 28.6 31.1 40.0 28.7 Technical rubber products and Gloves division pre-tax rose 25% and 28%

respectively, which more than offset the start-up losses of RM0.7m at clean

room product division. 3Q clean room product division losses narrowed to

RM0.1m compared to RM0.3m in 2Q.

Taxation (6.2) (7.0) (10.0) 41.9

Minority interest (0.5) (0.4) (0.8) 84.5Net profit 22.0 23.6 29.2 23.7 Filtered down from pre-tax profit but lower due to a higher effective tax

rate.

EPS (sen) 6.88 7.39 9.1 23.7

EBITDA margin (%) 14 14 16 Due to falling input raw material latex price.

Pretax margin (%) 10 10 12

Effective tax rate (%) 22 23 25



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Figure 3 : Segmental breakdown (turnover and pre-tax profit)

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Q-o-q

Chg (%)

Revenue (RM m)

Gloves division 226.1 237.8 249.5 233.4 251.2 262.9 281.2 6.9

Technical rubber products division 30.4 37.8 29.0 34.4 33.4 38.0 36.7 (3.5)Cleanroom products division - - - 13.5 4.8 3.8 4.8 28.4

Engineering division - - - 0.2 0.0 0.0 0.0 NM

Total 256.4 275.6 278.5 281.5 289.4 304.8 322.7 5.9

Pre-tax profit (RM m)

Gloves division 24.8 24.5 28.4 25.9 25.5 27.0 34.6 28.1

Technical rubber products division 3.1 2.2 2.8 4.4 3.4 4.4 5.5 25.2

Cleanroom products division - - - 0.1 (0.3) (0.3) (0.1) (64.9)

Engineering division - - - 0.1 0.0 0.0 0.0 NM

Total 27.9 26.6 31.1 30.5 28.6 31.1 40.0 28.7

Pre-tax profit margin (%)

Gloves division 11 10 11 11 10 10 12

Technical rubber products division 10 6 9 13 10 12 15

Cleanroom products division - - - 1 NM NM (2)

Engineering division - - - 31 NM NM NM



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DISCLOSURE & DISCLAIMER

Stock rating definitions

Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more

Buy - Expected 12-month total return of 10% or more

Hold - Expected 12-month total return between -10% and 10%

Sell - Expected 12-month total return of -10% or lessTrading buy - Expected 6-month total return of 10% or more arising from positive newsflow. However, upside may not be

sustainable.

Sector rating definitions

Overweight - Industry expected to outperform the market over the next 12 months

Neutral - Industry expected to perform in-line with the market over the next 12 months

Underweight - Industry expected to underperform the market over the next 12 months

Disclaimer

This report is for information purposes only and general in nature. The information contained in this report is based on data and

obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as

such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information

or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us

accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may

arise from the use of or reliance on the information or opinions in this publication. Any information, opinions or

recommendations contained herein are subject to change at any time without prior notice.

It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each

person who may receive or read this report. As such, investors should seek financial, legal and other advice regarding the

appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securitiesreferred to herein. This company and its related companies, their associates, directors, connected parties and/or employees

may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities

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other things, may give rise to real or potential conflict of interests.

Published & printed by:

ECM Libra Capital Sdn Bhd (579116-A)

2nd Floor, West Wing, Bangunan ECM LibraNo. 8 Jalan Damansara Endah

Damansara Heights

50490 Kuala Lumpur

Tel: (603) 2089 1888

Fax: (603) 2096 1868

alliance kossan 3q2012

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