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KENANGA RESEARCH

23 November 2012

Results Note

Kossan Rubber Industries


Showing signs of improvement
Period Actual vs. Expectations 3Q12/9MFY12 The 9-month revenue and net profit of RM916.9m and RM74.8m respectively were within the market expectations, which accounted for 74% and 71% of the consensus estimates. While showing signs of improvement, this set of results, however, only made up 78% and 66% of our forecasts. Declared a tax exempt interim dividend of 5.0 sen per share of RM0.50 each for the financial year ending 31 December 2012. This dividend payment is higher than last years tax exempt interim dividend of 3.0 sen. QoQ, the revenue increased by 5.9% due to the increased in the production output of gloves. The net profit meanwhile rose a higher 23.7% due to lower material prices (for instance, latex price declined from RM6.88 to RM6.05) and an increased capacity utilisation. Collectively, the net profit margin has further expanded to 9.1% from 7.8%. YoY, the revenue and net profit increased by 15.9% and 23.6% respectively. Apart from the aforementioned reasons, the improved profitability (net margin grew from 8.5% to 9.1%) was also attributed to a greater demand owing to the lower commodities price i.e. latex and nitrite prices. For the YTD, the revenue and net profit grew 13.1% and 10.9% respectively YoY due to the abovementioned reasons. We believe KOSSAN should deliver a better set of results going forward driven by factors such as (i) a stronger demand, (ii) better product mix, (iii) additional capacity (its new surgical gloves production line is expected to start production in January 2013) and (iv) with management expecting the clean-room division to show profits. However, the momentum of improvement is somewhat below our expectations. As such, we are revising our FY12 and FY13 earnings forecasts from RM113.5m and RM122.7m to RM105.7m and RM116.4m respectively, representing downward revisions of 6.9% and 5.1% respectively. The lower revenue forecast is due to the lower average selling prices (ASPs), which is in line with the lower raw materials cost. We are maintaining our OUTPERFORM call and revised our target price higher to RM3.64 from RM3.38, despite our earnings estimates being marginally cut. This is because KOSSANs valuation is still relatively undemanding at 8.8x to our FY13 EPS estimate currently (even after our earnings revisions). By pegging our adjusted lower FY13 EPS forecast of 36.4 sen to a -0.5 standard deviation PER valuation of 10.0x, the stock should be valued at 3.64. Higher latex prices and a stronger ringgit.
3.80 3.60 3.40 3.20 3.00 2.80

OUTPERFORM
Price: Target Price:
Share Price Performance

RM3.19 RM3.64

ay -

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No

Se p

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KLCI YTD KLCI chg YTD stock price chg

1618.55 5.7% -1.8%

Key Result Highlights

Stock Information
Bloomberg Ticker Market Cap (RM m) Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily vol: Free Float Beta KRI MK Equity 1,020.0 319.7 3.67 2.97 261,495 37% 0.9

Major Shareholders
KOSSAN HOLDINGS S/B KWSP EPF 50.9% 7.6% 5.0%

Outlook

Summary Earnings Table


FY Dec (RMm) Turnover EBIT PBT Net Profit (NP) Consensus (NP) Earnings Revision EPS (sen) EPS growth (%) DPS (sen) NTA/Share (RM) PER Price/NTA (x) Net Gearing (x) Dividend Yield (%) 2011A 1,090.0 130.1 112.9 89.7 28.0 -20.9% 7.0 1.54 11.5 2.1 0.2 2.3% 2012E 1,175.2 140.4 133.8 105.7 105.8 -23% 33.1 17.8% 7.5 1.79 11.2 1.8 0.1 2.4% 2013E 1,248.2 154.4 146.6 116.4 118.9 -19% 36.4 10.2% 7.9 2.08 11.1 1.5 0.0 2.5%

Change to Forecasts

Rating

Valuation

The Research Team research@kenanga.com.my +603 2713 2292

Risks

PP7004/02/2013(031762)

KENANGA RESEARCH

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Dividends

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Kossan Rubber Industries

23 November 2012

Result Highlight 3Q FY12 74.1 41.5 40.0 29.2 9.1 5.0 23.0% 12.9% 12.4% 9.1% 25.0% 2Q FY12 57.9 32.6 31.1 23.6 7.4 0.0 19.0% 10.7% 10.2% 7.8% 22.6% Q-o-Q Chg 28.1% 27.2% 28.7% 23.7% 23.7% N.M. 3Q FY11 43.0 32.9 31.1 23.6 7.4 3.0 15.4% 11.8% 11.2% 8.5% 22.9% Y-o-Y Chg 72.4% 26.1% 28.6% 23.6% 23.7% N.M. 9M FY12 173.1 104.4 99.7 74.8 23.4 5.0 18.9% 11.4% 10.9% 8.2% 23.3% 9M FY11 121.6 91.4 85.7 67.5 21.1 3.0 15.0% 11.3% 10.6% 8.3% 19.8% Y-o-Y Chg 42.4% 14.3% 16.4% 10.9% 10.7% N.M.

FY Dec (RMm) Turnover EBIT PBT Net Profit (NP) Core EPS (sen) DPS (sen) EBITDA margin EBIT margin PBT margin NP margin Effective tax rate

Source: Company, Kenanga Research


Segmental Result 3Q FY12 281.2 36.7 4.8 322.7 2Q FY12 262.9 38.0 3.8 304.8 Q-o-Q Chg 6.9% -3.5% 28.4% 5.9% 3Q FY11 249.5 29.0 0.0 278.5 Y-o-Y Chg 12.7% 26.5% N.M. 15.9% 9M FY12 796.8 108.1 11.9 916.9 9M FY11 713.4 97.2 0.0 810.6 Y-o-Y Chg 11.7% 11.3% N.M. 13.1%

FY Dec (RMm) Segment Revenue Gloves Technical rubber products Others Total Segment PBT Gloves Technical rubber products Others Total

34.6 5.5 -0.1 40.0

27.0 4.4 -0.3 31.1

28.1% 25.2% -64.9% 28.7%

28.4 2.8 0.0 31.1

22.1% 99.2% N.M. 28.6%

87.2 13.3 -0.7 99.7

77.6 8.0 0.0 85.7

12.3% 65.0% N.M. 16.4%

Source: Company, Kenanga Research


Forward PER
PRICE (RM) PER 5.4 x PER 7.2 x PER 9.0 x PER 10.9 x PER 12.7 x

Forward PBV
PRICE (RM) PBV 2.3 x PBV 1.0 x PBV 2.8 x PBV 1.5 x PBV 1.9 x

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jun-08 Jun-09 Jun-10 Jun-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-08 Sep-09 Sep-10 Sep-11 Jun-12 Sep-12 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Jun-08 Jun-09 Jun-10 Jun-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-12

Source: Bloomberg, Kenanga Research

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KENANGA RESEARCH

Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stocks Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). A particular stocks Expected Total Return is WITHIN the range of 3% to 10%. A particular stocks Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate).

MARKET PERFORM : UNDERPERFORM :

Sector Recommendations*** OVERWEIGHT NEUTRAL UNDERWEIGHT : : : A particular stocks Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). A particular stocks Expected Total Return is WITHIN the range of 3% to 10%. A particular stocks Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate).

***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: www.kenangaresearch.com Chan Ken Yew Head of Research

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KENANGA RESEARCH