AmResearch bullish on Kossan’s prospect

AmResearch bullish on Kossan’s prospect

Tags: AmResearch | Kossan Rubber Industries Bhd | strong demand | strong earnings

Written by Tony C H Goh
Wednesday, 14 October 2009 22:24

KUALA LUMPUR: AmResearch has upgraded its recommendation on KOSSAN RUBBER INDUSTRIES BHD [] to buy from hold previously, on the expectation that the glovemaker is poised to pose strong earnings on the back of better pricing and product mix.

Kossan is also set to benefit from the strong demand growth trend underpinned by a capacity boost to 18 billion pieces per annum by the end of 2011 from 11.1 billion currently.

In addition, AmResearch said it remained assured by the strong demand growth trend for examination gloves, as reflected by the group’s high utilisation rate in excess of 90%-91%.

“We have turned positive of Kossan’s earnings deliverance going forward, given the stronger earnings in the second half of FY09 on the back of smaller forex losses, better margins on its product portfolio mix and pricing power,” said the research house.

Kossan had previously entered into aggressive structured currency contracts to hedge its receivables for up to 10 months, with expiry in November 2009. So far, the group has recognised forex losses of RM12.2 million and RM12.5 million in 1Q and 2QFY09, respectively.

As the average US dollar to the ringgit exchange rate has weakened by around 3% to RM3.43 compared with RM3.52 in 3Q, the favourable exchange rate outlook has provided room for an earnings improvement for FY09.

Higher margins owing to Kossan’s product portfolio mix and better pricing power, as well as a strong demand will fuel Kossan's growth trend going forward.

All in, AmResearch raised its FY09 earnings forecast by 2% to RM57 million, and a further 25% and 26% to RM97 million and RM120 million for FY10 and FY11 respectively.

Ahead of buoyant earnings for rubber glove manufacturers and backed by strong fundamentals, it conservatively pegged Kossan’s FY10 earnings to a higher target price earnings (PE) of 10 times.

“Valuation is undemanding as the stock is still trading below its eight-year historical average of 12 times, and at a steep 40% discount against a 25% to 30% historical discount gap of 13 times that of Top Glove,” said AmResearch.

Kossan added 17 sen to close at RM4.95 on Oct 14.

http://www.theedgemalaysia.com/business-news/151331-amresearch-bullish-on-kossans-prospect.html