AmWatch - Kossan Rubber : 2QFY14: Volumes impacted by water cuts BUY, 21 Aug 2014

SECTOR FOCUS OF THE DAY

Kossan Rubber : 2QFY14: Volumes impacted by water cuts           BUY

We maintain BUY on Kossan Rubber Industries with an unchanged fair value of RM5.00/share. This is based on an unchanged forward PE of 17.5x. Kossan reported 2QFY14 earnings of RM35mil (-6% QoQ; +4% YoY), which brought its 1HFY14 total to RM71mil (+7% YoY). This accounted for 40% of our and 42% of street estimates.

We deem the results to be within expectations given that Kossan’s results are seasonally stronger in 2H and management’s earlier guidance of 1HFY14 numbers coming in at 40%-45% of the full year’s earnings. Kossan’s revenue slipped marginally QoQ to RM304mil in 2QFY14. This was mainly due to lower production volumes following a state-wide, month-long water rationing exercise in April 2014. Its output value for the quarter was subsequently reduced by ~RM18mil (6% of 2QFY14’s revenue).

We believe that the negative impact of this news may have been priced in by management given their conservative guidance. That said, we suppose that the lower volumes could have been partially offset by the re-commissioning of eight production lines that were shut down for conversion works.

Meanwhile, the group’s non-core TRP division posted encouraging numbers in light of higher exports of automotive parts and dock fenders. YoY, the division’s 1HFY14 pretax profit rose 10% on the back of an 11% increase in revenue. Despite the 6% YoY decline in topline, Kossan managed to expand its EBITDA margin by 2ppts to 20% in 1HFY14 thanks to its continuous move up the value chain, lower input prices, improved production efficiencies, and tight cost control.

Moving forward, we expect Kossan’s sales volume and net profit to trend upwards in view of the progressive commissioning of its three new plants in Meru. We are maintaining our numbers for now. The stock is trading at undemanding PEs of 12x-14x its FY14F-FY15F earnings, below the industry’s average of 14x-16x.

Others :

Bumi Armada : Slow FPSO recognition, low OSV & T&I utilisation                BUY

KL Kepong : Erosion in downstream margin in 3QFY14     HOLD

IOI Corporation : Squeeze in manufacturing margin in 4QFY14     HOLD

MSM Malaysia : Earnings rebounded in 2QFY14 HOLD

Star Publications : Further headwinds ahead       HOLD

AirAsia : Almost red ink, but focus will shift to inflexion point       HOLD

Economic Update : Real interest rate turns positive in July as inflation tapers to 3.2% YoY

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