Kossan Rubber : New technology to drive long-term growth BUY

STOCK FOCUS OF THE DAY

Kossan Rubber : New technology to drive long-term growth       BUY

We reiterate our BUY call on Kossan Rubber Industries (KRI) with a higher FV of RM8.64 from RM7.51 previously, based on an unchanged target PE of 22x on FY18F EPS. We have also rolled forward our valuation base year to FY18F.  After an unexciting FY16, marked by plant maintenance works, absence of capacity expansions and a price war in 2HFY16, KRI's net profit is expected to improve from 2HFY17 onwards. We believe that KRI's net profit will grow by 15% in FY18F on the back of an increase in the production capacity. KRI is expected to add 1 production line in FY17F, which would raise annual production capacity from 22bil to 25bil gloves. The group's production capacity is expected to expand further from 25bil to 29.5bil gloves by end-FY18F due to the addition of 2 lines.   

We estimate Kossan’s EBITDA margin to be relatively unchanged at 17%-18% in FY18F as the group passes any increase in the cost of latex and nitrile to its customers. KRI's long-term profit growth is expected to be underpinned by its commitment to R&D (research and development). One of KRI’s innovation is the low dermal technology used to produce non-allergenic rubber gloves, thus suitable for all users. Currently, about 20% of KRI's production lines are manufacturing gloves with low dermal technology. KRI's low dermal technology is patented and certified by the US FDA (Food and Drugs Administration). Selling prices of examination gloves produced based on the low dermal technology are slightly higher than others. We believe that this would support KRI's operating profit margin in the long term.           

Others :

Luxchem Corp. : Looking ahead to profit recovery in 3Q                 BUY

Sasbadi Holdings : Mid-year slump for schoolbooks                          BUY

Bursa Malaysia : DATV for equities likely to taper in 2HFY17          HOLD

Heineken Malaysia : Below expectations                                              HOLD                    

QUICK TAKE

Genting Singapore : Implications of MBS’ 2QFY17 results               SELL

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