KOSSAN (7153) - Kossan Rubber Industries - Higher expenses in 4Q
Target RM6.13 (Stock Rating: ADD)
Kossan’s FY14 net profit came in below our (93% of full-year forecast) and consensus’ estimates (91%). The worse-than-expected results were due to the delay in the commencement of its new plants and higher operating costs in 4Q. In view of this, we cut our FY15-16 EPS forecasts by 4-8% which also reduces our target price (based on 18.9x CY16 P/E, 10% discount to Hartalega). We nonetheless maintain an Add on Kossan given its relatively cheaper valuation and stronger earnings growth than its peers. The stock still offers a more than 10% upside in total returns after our earnings cut. Kossan stays our top pick within the sector as we still believe that it will be the least impacted by the stronger competition. The stronger USD and lower crude oil prices should help to partially buffer the impact of stronger competition.
Weaker FY14 performance
Kossan’s FY14 revenue dropped 0.6% yoy while core net profit declined 2.1% yoy. The lower revenue was mainly due to the lower revenue from the glove division (-1.9% yoy) which had offset the growth registered by the technical rubber product (TRP, +1.1% yoy) and cleanroom (+37.5% yoy) divisions. Glove revenue was impacted by the lower selling prices of its rubber gloves which declined in tandem with the lower price of raw materials and the flattish sales volume in 9M due to the state-wide water rationing in April and staggered conversions of powdered natural latex gloves to produce powder-free nitrile gloves in 1Q. In 4Q, glove revenue grew 9.9% thanks to the higher sales volume as its new plant 1 started full commercial production in October. The growth of TRP and cleanroom was driven by the higher sales volume which offset the lower ASP due to the lower raw material prices. FY14’s net profit declined by a greater extent than its top line due to higher depreciation and interest expenses.
Qoq core net profit declined
On a qoq basis, revenue increased 9.9% while core net profit declined 7.1%. All of its divisions’ sales were better qoq driven by higher sales volume. The sales of the main driver, glove division (+6.2% in revenue) was boosted by the higher sales volume (+7%) due to the new sales contribution from its plant 1 which achieved full commercial production in Oct. Despite the stronger revenue, core net profit declined 7.1% on higher operating cost which could be due to start-up costs at its new plant.
Source: CIMB Daybreak - 26 February 2015
Target RM6.13 (Stock Rating: ADD)
Kossan’s FY14 net profit came in below our (93% of full-year forecast) and consensus’ estimates (91%). The worse-than-expected results were due to the delay in the commencement of its new plants and higher operating costs in 4Q. In view of this, we cut our FY15-16 EPS forecasts by 4-8% which also reduces our target price (based on 18.9x CY16 P/E, 10% discount to Hartalega). We nonetheless maintain an Add on Kossan given its relatively cheaper valuation and stronger earnings growth than its peers. The stock still offers a more than 10% upside in total returns after our earnings cut. Kossan stays our top pick within the sector as we still believe that it will be the least impacted by the stronger competition. The stronger USD and lower crude oil prices should help to partially buffer the impact of stronger competition.
Weaker FY14 performance
Kossan’s FY14 revenue dropped 0.6% yoy while core net profit declined 2.1% yoy. The lower revenue was mainly due to the lower revenue from the glove division (-1.9% yoy) which had offset the growth registered by the technical rubber product (TRP, +1.1% yoy) and cleanroom (+37.5% yoy) divisions. Glove revenue was impacted by the lower selling prices of its rubber gloves which declined in tandem with the lower price of raw materials and the flattish sales volume in 9M due to the state-wide water rationing in April and staggered conversions of powdered natural latex gloves to produce powder-free nitrile gloves in 1Q. In 4Q, glove revenue grew 9.9% thanks to the higher sales volume as its new plant 1 started full commercial production in October. The growth of TRP and cleanroom was driven by the higher sales volume which offset the lower ASP due to the lower raw material prices. FY14’s net profit declined by a greater extent than its top line due to higher depreciation and interest expenses.
Qoq core net profit declined
On a qoq basis, revenue increased 9.9% while core net profit declined 7.1%. All of its divisions’ sales were better qoq driven by higher sales volume. The sales of the main driver, glove division (+6.2% in revenue) was boosted by the higher sales volume (+7%) due to the new sales contribution from its plant 1 which achieved full commercial production in Oct. Despite the stronger revenue, core net profit declined 7.1% on higher operating cost which could be due to start-up costs at its new plant.
Source: CIMB Daybreak - 26 February 2015
