TA Kossan Aug 2013 Initiate Coverage
Transcript of TA Kossan Aug 2013 Initiate Coverage
I n i t i a t i o n C o v e r a g e
Monday, August 12, 2013
FBM KLCI: 1,779.32
Sector: Manufacturing
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048
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TA SecuritiesA Member of the TA Group
Kossan Rubber Industries Berhad
TP: RM6.80 (+12.6%) Affordable Exposure to Glove Manufacturing Last traded: RM6.04
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*
BUY
TA Research Team Coverage +603-2072-1277 ext: 1612 [email protected] www.taonline.com.my
Investment Thesis and Key Assumptions
We initiate coverage on Kossan with a target price of RM6.80/share. We like
Kossan for its aggressive expansion plan to double production capacity to
32bn pieces of gloves/annum by 2018. Signaling their commitment, more
than 70 acres of industrial land with natural gas supply has been secured for
expansion. Production lines will be highly versatile and interchangeable with
minimum downtime. The new plants are envisaged to improve profit margins
through lower production cost per glove and higher production efficiency.
We are also positive on the shift of focus towards higher margin gloves.
Specifically, this relates to gloves with lower levels of competition such as
special purpose, nitrile and latex powdered-free gloves. In tandem with their
goals, Kossan aspires to become the world’s largest manufacturer of surgical
gloves. In operation since February, they currently have a surgical gloves
factory producing approximately 650mn surgical gloves/annum.
Growth will be mainly underpinned by the increase in total installed capacity.
Supported by strong demand for gloves, we are expecting earnings growth of
29.7% and 17.1% in FY13 and FY14. That said, as capacity from rival glove
manufacturers starts to kick in, we anticipate a lower utilization rate in FY15.
Hence, our predicted earnings growth for FY15 will decrease to 13.6%.
All in all, we like Kossan for its affordable exposure to the glove
manufacturing industry. Kossan’s FY14 PER of 12.4x is undemanding vs. the
industry’s average of 14.7x. Our target price implies a total potential upside of
16.2% from the stock’s last closing price. Therefore, we initiate coverage on
Kossan with a BUY rating. Key re-rating catalyst include: 1) Stronger than
expected demand for gloves; 2) Maintenance of margin despite increased
competition; 3) Better than anticipated returns from expansion into TRP.
Downside risks include 1) Onset of competition from local glove manufacturers
who are continually increasing total installed capacity; 2) Expected rise in
natural gas prices from RM16.07/mmbtu to RM40.00/mmbtu.
Earnings Summary (RM mn)
FYE Dec 31 2011 2012 2013f 2014f 2015f
Revenue 1,090.0 1,234.0 1,272.3 1,536.0 1,731.1
Other income 10.4 4.4 4.6 4.9 5.1
Tota l Cost (980.0) (1,093.6) (1,097.5) (1,331.2) (1,497.5)
PBT 112.9 138.5 171.9 202.8 232.6
Taxation (21.8) (33.7) (36.0) (43.7) (51.8)
Net profi t 89.7 102.2 132.5 155.2 176.3
EPS (s en) 28.0 32.0 41.5 48.5 55.1
EPS Growth (%) (20.9) 13.9 29.7 17.1 13.6
DPS (s en) 7.0 12.0 18.7 21.8 24.8
Div Yield (%) 1.1 2.0 3.1 3.6 4.1
PER (x) 21.7 19.1 14.7 12.6 11.1
Q Share Information
Bloomberg Code KRI MK
Stock Code 7153
Listing Main Market
Share Cap (mn) 318.6
Market Cap (RMmn) 1924.5
Par Value 0.50
52-wk Hi/Lo (RM) 6.12/2.97
12-mth Avg Daily Vol ('000 shrs) 495.1
Estimated Free Float (%) 37.4
Beta 0.8
Major Shareholders (%)
Kossan Holdings Sdn Bhd - 51.24
EPF -5.03
Invesco Ltd - 5.03
Forecast Revision
FY13 FY14
n.a. n.a.
132.5 155.2
Consensus 127.5 149.5
103.9 103.8
Financial Indicators
FY13 FY14
Net gearing (x) 0.1 0.1
CFPS (RM) 0.4 0.2
P/CFPS (x) 13.8 26.7
ROA (%) 13.0 14.1
ROE (%) 20.7 21.5
NTA/Share (RM) 2.1 2.4
Price/ NTA (x) 2.9 2.5
Share Performance (%)
Price Change KRI FBM KLCI
1 mth 4.1 0.4
3 mth 39.2 0.6
6 mth 80.8 8.7
12 mth 85.8 8.1
Kumpulan Wang Persaraan - 5.60
Forecast Revision (%)
Net profit (RMm)
TA's / Consensus (%)
Previous Rating n.a.
(12-Mth) Share Price relative to the FBM KLCI
Source: Bloomberg
12-Aug-13
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TA SecuritiesA Member of the TA Group
1.0 Background
Established in 1979, Kossan Rubber Industries Bhd was one of the first
companies in Malaysia to venture into glove manufacturing. From the
introduction of its first glove production line in August 1988, Kossan is now one
of the largest glove manufacturers in the world with an estimated total installed
capacity of approximately 16bn gloves/annum by the end of FY13.
Furthermore, Kossan is also Malaysia’s largest manufacturer for Technical
Rubber Products (TRPs) with approximately 9,000mt of rubber compound
produced. Kossan employs more than 5,200 workers in 15 plants located
throughout the Klang Valley.
Figure 1: Products offered
Disposable Gloves Technical Rubber Products
Source: Companies, TA Securities
2.0 Business Operations
Table 1: Revenue Distribution (RM mn)
FY08 FY09 FY10 FY11 FY12
Total Revenue 897.2 842.1 1046.9 1090.0 1234.0
Revenue - Gloves 788.9 754.8 936.5 936.5 1074.7
Revenue - TRP 108.3 87.4 110.4 153.4 159.3
Proportion - Gloves 87.9% 89.6% 89.5% 85.9% 87.1%
Proportion - TRP 12.1% 10.4% 10.5% 14.1% 12.9%
Source: Companies, TA Securities
2.1 Technical Rubber Products (TRPs)
Apart from gloves, Kossan also undertakes the production of TRPs which
contributes approximately 10% to total revenue. The bulk of TRPs supplied by
Kossan are to the automotive industry, marine industry, construction & civil
engineering and aerospace. For the automotive industry, products are mainly
supplied to the US, Germany and Australia. Currently, Kossan produces
approximately 9,000 mt of rubber compound per year. Unlike rubber gloves,
technical rubber products require longer production times [lead times of four
to six months]. This increases their exposure to fluctuations in the exchange
rate and material prices. Hence, margins for TRP products can vary from 5% to
40%, with customizable products carrying higher margins. In terms of
prospects, Kossan will construct a technical rubber manufacturing facility in
Indonesia, specializing in the production of seismic bearings. The plant which
will begin construction within the year is expected to contribute to earnings in
the 1HFY14. Also, the company is on the lookout for overseas based rubberized
automobile parts manufacturer-distributors. Potential benefits from the
acquisition include knowledge transfer and a pathway into the overseas market
through leverage of a local brand.
12-Aug-13
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TA SecuritiesA Member of the TA Group
2.2 Gloves
Kossan derives the bulk of its revenue from the production of gloves, which
makes up 90% of its total revenue. Key products produced in its glove division
include examination gloves (powder-free latex and nitrile), surgical gloves,
cleanroom gloves and facemask. As of FY13, Kossan has a total installed glove
capacity of 16bn gloves/annum. Compared to the other glove manufacturers
under our coverage, this places Kossan as the third largest manufacturer,
trailing behind Top Glove and Supermax. In terms of geographic distribution
(see Figure 2), Kossan exports a combined 80% of its gloves to USA, Canada and
Europe. Customers in these regions tend to place higher emphasis on quality
rather than price.
Figure 2: Geographic Distribution
Source: Companies, TA Securities
As a percentage of total products (see Figure 3), 55% of gloves manufactured
are made from latex and 45% from nitrile. This translates to a projected FY13
year end capacity of 8.8bn latex gloves/annum and 7.2bn nitrile gloves/annum.
Similar to Supermax, this provides Kossan with a diverse mix of products,
making them less susceptible to changes in consumer tastes. To recap, demand
for nitrile gloves remains resilient as consumers have been switching from the
usage of latex gloves to nitrile gloves. Cited reasons for the change in
preference include thinner nitrile gloves and prevalence of protein allergies in
latex gloves.
Figure 3: Product mix
Source: Companies, TA Securities
USA & Canada,
50%Europe, 30%
Asia
Pacific,
12%
Latin
America, 8%
Nitrile
45%
Latex
55%
12-Aug-13
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TA SecuritiesA Member of the TA Group
Of the produced gloves, 95% is supplied to the medical industry such as
examination and surgical gloves. The remaining 5% is supplied to the non-
medical industry in sectors such as food service, automotive and household.
Thickness and characteristics of gloves will vary according to the targeted
market segment.
In terms of customer diversity, Kossan markets its gloves to 200 active
customers, spread across 150 countries. Its biggest and top five customers
contribute approximately 11% and 35% of total sales. Over the near term, this
dependency will be mitigated by strong continued demand for gloves. However,
as rival glove manufacturers continue to add to existing capacities, we do not
discount the possibility of future price reductions to maintain existing
customers.
The proportion of gloves manufactured under original equipment
manufacturer (OEM) and original brand manufacturer (OBM) are 80% and
20% respectively. While this may result in lower margins, it reduces the
possibility of conflicts arising from competition with existing customers.
3.0 Expansion Plans – Gloves
Figure 4: Estimated Capacity
Source: Companies, TA Securities
More than 70 acres of industrial land with natural gas supply located in the
Klang Valley has been secured for expansion. By 2018, management targets to
increase the production capacity to 32bn pieces of gloves/annum. Currently,
three plants are already under construction with expectations of commercial
running in between 4QFY13 to 1QFY14. Together, these plants will add
approximately 5.0bn pieces of gloves/annum constituting mainly of nitrile
products. In addition to current installed capacity of 16bn pieces of
gloves/annum, total installed capacity by FY14 should rise to 21.0bn pieces of
gloves/annum. Incoming capacity will be skewed towards the production of
nitrile gloves.
Production lines will be highly versatile and interchangeable with minimum
downtime. Taking the latest lines as a benchmark, each of Kossan’s double
former line has the capability of producing approximately 30k to 35k pieces of
gloves/hour. While this lags Hartalega’s 45k pieces of gloves/hour, it is above
the industrial average of 18k to 22k pieces of gloves/hour. Progressing through
the phases of expansion, incremental improvements to production efficiency
will be expected. The new plants are envisaged to improve profit margins
through lower production cost per glove and higher production efficiency.
Production efficiency can be expanded to include items such as higher output,
less rejects, less downtime and light weight products. These cost cutting
measures will aid Kossan in maintaining their margins in anticipation of
potential long run margin compression of nitrile gloves.
12-Aug-13
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TA SecuritiesA Member of the TA Group
4.0 Business Strategy - Gloves
4.1 Business Positioning and Market Segment
Figure 5: Targeted Market Segment
Source: Companies, TA Securities
Looking ahead, Kossan will focus resources on the production of special
purpose, nitrile and latex powdered-free gloves. These products are expected to
fetch higher profit margins due to lower levels of competition. In tandem with
their goals, Kossan aspires to become the world’s largest manufacturer of
surgical gloves. In operation since February, they currently have a surgical
gloves factory producing approximately 650mn surgical gloves/annum. This
places them among the largest surgical glove manufacturers in the world.
In comparison, less emphasis will be placed on latex powdered gloves and
gloves made from materials such as PVC, PU and Vinyl. It is noted that gloves in
this segment run a higher risk of overcapacity due to the low barriers to entry.
Given this, prices of these types of gloves are more elastic with a heightened
risk of price war initiated by smaller manufacturers.
Overall, we view this move as positive. This is consistent with the current
market trend as consumers have been shifting from the usage of latex gloves to
nitrile gloves (see Figure 6). Supporting the trend, margin compression of latex
gloves have also been recorded in Top Glove’s [largest manufacturer of latex
gloves] latest quarter results. We are particularly excited about Kossan’s
aspirations to be the largest manufacturer of surgical gloves. We opine that this
will provide Kossan with future earnings stability pending the eventual
commoditization of nitrile gloves in the long run.
12-Aug-13
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TA SecuritiesA Member of the TA Group
Figure 6: Examination gloves export from Malaysia
Source: Companies, TA Securities
5.0 Financials
5.1 Revenue
Figure 7: Revenue (RMmn)
Source: Companies, TA Securities
Since FY06, Kossan has shown consistent growth with revenue increasing by
116% or CAGR of 13.7% (see Figure 7). The main drivers of revenue growth are
total installed capacity, demand for gloves, average selling prices (ASP) and the
USD/MYR rate. Total installed capacity determines the quantity of gloves
produced and ultimately sold. However, this relationship only holds true if
additional capacity is met by increasing demand. Believing demand will remain
strong and continue to grow, Kossan targets to double total installed capacity to
32bn pieces of gloves/annum by 2018.
Furthermore, revenue will also be determined by ASPs. ASPs differ according to
the type of glove being sold. Products such as special purpose, nitrile and
powder-free latex gloves fetch higher and more stable ASPs compared to
powdered latex, PVC, PU and vinyl gloves. In an effort to increase profit
margins, new lines will be skewed towards the production of nitrile gloves.
Kossan has also signaled its intent to becoming the world’s largest
manufacturer of surgical gloves. Lastly, fluctuations in the USD/MYR rate will
also play an impact on revenue. As most sales are conducted in USD, a higher
(lower) USD/MYR rate will result in higher (lower) revenue.
83
77
69
56 53
17
23
31
44 47
0
10
20
30
40
50
60
70
80
90
2008 2009 2010 2011 2012
NR
SR
571.3
702.6
897.2842.1
1,046.91,090.0
1,234.0
49.8%
23.0%
27.7%
-6.1%
24.3%
4.1%
13.2%
-10%
0%
10%
20%
30%
40%
50%
60%
0.0
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400.0
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1,000.0
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1,400.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12
% ChangeRMmn
12-Aug-13
Page 7 of 15
TA SecuritiesA Member of the TA Group
5.2 Costs
Figure 8: Cost breakdown
Source: Companies, TA Securities
Similar to other glove manufacturers, Kossan’s main cost component is material
expenses. Material expenses make up 55% of total cost and consist of latex and
nitrile used during the production of gloves. Purchased in USD, this creates a
natural hedge against fluctuations in the USD/MYR rate. Also, given that nitrile
gloves are on average thinner than latex gloves, we note that less material is
required for the production of nitrile gloves. We note that the average weight of
latex and nitrile gloves is 5.5g and 3.4g respectively. Taking the average price of
latex and nitrile in FY12 and assuming no wastage is made, 3.6sen of latex and
2.1sen of nitrile is required for the production of one latex and nitrile glove
respectively. Hence, apart from the respective price of latex/kg and nitrile/kg,
material cost will also depend on the composition of latex to nitrile gloves
produced.
Another major cost component for glove manufacturers is labour cost.
Currently, Kossan employs approximately 5,200 workers. For Kossan, labour
cost formulates 10% of total cost. This is due to the labour intensive attributes
of glove manufacturing. The two most labour intensive process in glove
manufacturing is stripping and packaging. To mitigate this impact, efforts on
automation such as the introduction of robotics are being implemented. Apart
from reducing labour cost, this will also ensure consistent quality and reduce
human errors which will decrease output cost. Labour cost will be impacted by
events such as a change in the minimum wage policy and shortage of labour
supply.
Kossan is also reliant on energy costs, which is mainly used for the heating of
gloves. Of the 9% attributed to energy costs, 6% is composed of natural gas and
3% for electricity. Natural gas availability represents one of the main
considerations during land acquisitions. In the absence of natural gas,
manufacturers will then look towards biomass for energy needs. For Kossan,
energy cost will mainly be determined by the prices of natural gas, which in
turn will be affected by the continuance of subsidies and supply of natural gas.
Material
55%
Others
9%
Packaging
8%
Labour
10%
Energy
9%
Chemical
9%
12-Aug-13
Page 8 of 15
TA SecuritiesA Member of the TA Group
Combined, the above factors represent close to 75% of total cost. In an effort to
provide earnings stability, Kossan employs a cost pass through mechanism in
respect to changes in cost. Any increase/decrease in cost will be consequently
met with an increase/decrease in ASP. As a result, a change in cost is unlikely to
play a major impact on earnings in the long run. However, due to a one month
time lag in passing on cost to consumers, we do not discount that earnings will
ultimately be impacted during that period.
5.3 Balance Sheet and Cash Flow
Kossan has a healthy balance sheet with a low net gearing ratio of 10%,
implying that it isn’t highly levered (see Table 2). Of total debt, long term debt
is low at 20% as the bulk of interest bearing borrowings are short term. The
duration of long term borrowing vary from three to six years, used mainly for
the purchase of land, machineries and equipments. In comparison, short term
borrowings such as banker’s acceptance and revolving credit are used for
working capital purposes. Also, to prevent earnings dilution, Kossan’s balance
sheet is free from convertible instruments and hybrid borrowings.
Table 2: Net gearing
FY08 FY09 FY10 FY11 FY12 1QFY13
Long Term Debt (%) 16 23 16 12 18 20
Short Term Debt (%) 84 77 84 88 82 80
Net Gearing (%) 63 51 24 18 16 10 Source: Companies, TA Securities
Net operating cash flow for FY12 stood strong at RM93mn. In line with profit
growth from strong demand and increased capacity, we believe future
operating cash flow will be sufficient to support planned capital expenditure
(CAPEX) and an increase in the dividend payout ratio (from 35% to 50% in the
next two years). Expected CAPEX over the next five years will range between
RM70mn to RM80mn. This will mainly be used for the purchase of plant and
equipment, in support of Kossan’s expansion activities.
6.0 Peer Comparison
In reference to Figure 11, of the glove manufacturers under our coverage,
Kossan is the third largest glove manufacturer (see Figure 9). With an expected
installed capacity of 16bn gloves/annum by the end of the year, Kossan trails
Supermax’s installed capacity of 17.8bn gloves/annum albeit leading
Hartalega’s total installed capacity of 14bn. From a diversity perspective,
Kossan is one of the more balanced manufacturers with a close to equal mix of
nitrile and latex gloves. Compared to Hartalega and Top Glove, their more
diversified exposure will provide them with earnings stability in situations of
changes in consumer demand between nitrile and latex gloves.
12-Aug-13
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TA SecuritiesA Member of the TA Group
Figure 9: Nitrile and latex capacity (mn gloves/annum) as at July 2013
Source: Companies, TA Securities
In terms of margins, Kossan enjoys industry average margins ranking between
Supermax and Top Glove with a PBT margin of 11.2% (see Figure 10). Given
their relative similar product composition, we opine that Supermax may have
better margins due to their higher composition of OBM products. Also, Kossan’s
margins may be pulled back by the variance in margins of TRP products which
ranges between 5% and 40%. That said, we anticipate margins to improve as
Kossan expands capacity in lucrative segments such as specialty purpose gloves
and nitrile gloves. We are predicting PBT margins of 13.5% and 13.2% for FY13
and FY14 respectively.
Figure 10: PBT Margin (%) FY12/FY13*
Source: Companies, TA Securities
Taking average profit per worker as a benchmark for efficiency, we can see that
Kossan is the third most efficient glove manufacturer (see Figure 11). Their
average profit per worker of RM19,647 is slightly above Top Glove but trails
Supermax and Hartalega. That said, coupled with automation efforts and
expansion into higher margin products, we opine that average profit per
worker will increase in the future.
7.2
7.1
7.1
12.6
8.8
10.7
31.0
1.4
16.0
17.8
41.9
14.0
0.0 10.0 20.0 30.0 40.0 50.0
Kossan
Supermax
Top Glove
Hartalega
Total Capacity Latex Capacity Nitrile Capacity
11.2
10.4
29.64
13.8
0 5 10 15 20 25 30 35
Kossan
Top Glove
Hartalega*
Supermax
12-Aug-13
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TA SecuritiesA Member of the TA Group
Figure 11: Average profit per worker (FY12/FY13*)
Source: Companies, TA Securities
7.0 Risks
Akin to other glove manufacturers, Kossan’s earnings will be influenced by
material prices, exchange rate, energy cost and labour cost. Before proceeding,
we would like to reiterate that the sensitivity analysis conducted below is based
on the assumption that prices remain unchanged in respect to increases or
decreases in cost.
7.1 Material prices
As discussed earlier, material price is the largest component of cost, making up
55% of total cost. With this, fluctuations in material prices, specifically the price
of latex and nitrile plays an important role in the determination of earnings.
Keeping everything else constant, a 10 sen (1.7%) increase in the price of latex
decreases earnings by 3.0%. For nitrile, a 10 sen (1.8%) increase in the price of
nitrile will decrease earnings by 2.9%.
With near record stock levels and continued global uncertainties, we expect
material prices to remain soft for the foreseeable future. We are currently
predicting latex and nitrile prices of RM6.00/kg and RM5.60/kg respectively.
The main determinants of latex and nitrile prices include the demand for
automotive vehicles and the respective supply of latex and nitrile.
Figure 12: Price of Crude Oil, Natural Rubber and Synthetic Latex
Source: WTI, MRB, Companies, TA Securities
Kossan Top Glove Hartalega* Supermax
No. of workers 5,200 11,000 3,700 3,500
Avg. profit per worker (RM) 19,647 18,430 63,412 34,777
Avg. rev per worker (RM) 237,308 210,405 278,928 284,964
0
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RM/KGUSD/bbl
Crude Oil Latex Nitrile
12-Aug-13
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TA SecuritiesA Member of the TA Group
Figure 13: Sensitivity Analysis on Latex price
\
Source: Companies, TA Securities
Figure 14: Sensitivity Analysis on Nitrile price
\
Source: Companies, TA Securities
7.2 Exchange rate
Secondly, most sales conducted by Kossan are denominated in USD. As a result,
fluctuations in the USD/MYR rate will have an impact on earnings. That being
said, this impact is minimized by the purchase of materials and chemicals in
USD. Incorporating this, we note that a 10 sen appreciation/depreciation
(3.2%) in the USD/MYR rate will increase/decrease earnings by 2.2%, ceteris
paribus. We are currently predicting a year end USD/MYR rate of between
RM3.05 to RM3.11.
Figure 15: USD/MYR Rate
Source: Bloomberg, TA Securities
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% Change in Earnings
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12-Aug-13
Page 12 of 15
TA SecuritiesA Member of the TA Group
Figure 16: Sensitivity Analysis on USD/MYR Rate
\
Source: Companies, TA Securities
7.3 Energy cost
Meanwhile, energy cost used mainly for the heating of gloves makes up 9% of
Kossan’s total cost. Of this, 6% is derived from natural gas and 3% from
electricity. With the potential removal of government subsidies, natural gas
prices are expected to rise from the current average of RM16.07/mmbtu to
within RM40.00/mmbtu in the near future. Based on our back of the envelope
calculations, a RM5.00/mmbtu (31.1%) increase in natural gas price will
decrease earnings by 18.0%. In preparation, glove manufacturers including
Kossan have been looking towards biomass as a potential substitute for natural
gas. However, as the price of biomass increase in tandem with demand growth,
energy costs will ultimately rise as a result of the reduced subsidies.
Figure 17: Sensitivity Analysis on Natural Gas Price
\
Source: Companies, TA Securities
7.4 Labour cost
Being a labour intensive industry, labour cost makes up 9% of total cost. Hence,
fluctuation in cost will be influenced by changes to wages such as the recent
implementation of the minimum wage policy. Based on the current no. of
workers, every RM100 increase in monthly wages will increase cost by
RM6.24mn.
-8.6
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%Change in Earnings
12-Aug-13
Page 13 of 15
TA SecuritiesA Member of the TA Group
Earnings forecast and Assumptions
Table 3: Assumptions
Drivers Assumption FY13 FY14 FY15
Capacity (bn) 15.6 19.7 22.8
Utisation rate (%) 85.0 85.0 83.0
Average ASP 27 27 27 Source: Companies, TA Securities
Our broad based assumptions for FY13 to FY15 include the commissioning of
plants as scheduled. This assumption ignores the potential of delays and trusts
that plants will be fully commissioned within its expected time frame. In other
words, our assumed capacity for FY13/FY14/FY15 is 15.6bn/19.7bn/22.8bn
pieces of gloves/annum. FY14 capacity will be boosted by the expected
completion of three plants between 4QFY13 and 1QFY14.
Secondly, we expect the average price of latex and nitrile to remain stable at
RM6.00/kg and RM5.60/kg, Prices are expected to be kept down by maturing
plantations in Thailand, Cambodia and Vietnam. Further catalyst includes the
slowdown in China’s car market arising from the tapering of economic
activities, which would impose less pressure on latex price escalation.
We assume average ASPs to remain stable at USD27/thousand gloves. Here, we
expect offsetting impacts from Kossan’s venture into higher margin gloves and
potential competition. There will be a positive impact on ASPs as Kossan
increase production of the higher priced specialty gloves. However, as rival
glove manufacturers continue to increase installed capacities, we do not
discount the possibility of reduced ASPs due to increased competition.
Lastly, we expect the capacity utilization rate to remain stable at 85% over the
next two years and decrease to 83% in FY15. Over the next two years, the
utilization rate will be supported by the strong continued demand for nitrile
gloves. However, in FY15, as capacities from rival glove manufacturers begin to
come aboard, we expect a decrease in the utilization rate to 83%.
Based on the above assumptions, we derive our FY13/FY14/FY15 earnings
estimates of RM132.5mn/RM155.2mn/RM176.3mn. This translates to an
earnings growth of 29.7%/17.1%/13.6% in FY13/FY14/FY15.
Valuation and Recommendations
Using our target industry PE multiple of 14x, we fairly value Kossan at
RM6.80/share. Taking into account proceeds from capital gains and dividend
yield, this translates into a total return of 16.2%. We also like Kossan for its
affordable exposure to the glove manufacturing industry. Kossan’s FY14 PER of
12.4x is undemanding vs. the industry’s average of 14.7x (see Table 5). With
that, we initiate coverage on Kossan with a BUY recommendation. Key
opportunities and threats include: 1) Plan to double total installed capacity to
32bn pieces of gloves/annum by 2018; 2) Shifting focus towards higher margin
gloves such as special purpose and nitrile gloves; 3) Expansion of TRP facilities
with potential of high margins for customized products; 4) Onset of
competition from local glove manufacturers who are continually increasing
total installed capacity; 5) Expected rise in natural gas prices from
RM16.07/mmbtu to RM40.00/mmbtu.
12-Aug-13
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TA SecuritiesA Member of the TA Group
Table 4: Earnings Summary Profit & Loss (RMmn)
FYE Dec 31 2011 2012 2013f 2014f 2015f
Revenue 1,090.0 1,234.0 1,272.3 1,536.0 1,731.1
Other income 10.4 4.4 4.6 4.9 5.1
Total Cost (980.0) (1,093.6) (1,097.5) (1,331.2) (1,497.5)
PBT 112.9 138.5 171.9 202.8 232.6
Taxation (21.8) (33.7) (36.0) (43.7) (51.8)
Net profit 89.7 102.2 132.5 155.2 176.3
EPS (sen) 28.0 32.0 41.5 48.5 55.1
EPS Growth (%) (20.9) 13.9 29.7 17.1 13.6
DPS (sen) 7.0 12.0 18.7 21.8 24.8
Div Yield (%) 1.1 2.0 3.1 3.6 4.1
PER (x) 21.7 19.1 14.7 12.6 11.1
Balance Sheet (RMmn)
FYE Dec 31 2011 2012 2013f 2014f 2015f
PPE 433.0 514.4 547.5 578.3 606.1
Others 5.1 5.1 5.1 5.1 5.1
Fixed Asset 438.0 519.4 552.5 583.4 611.2
Cash 51.6 99.8 140.0 114.2 134.4
Others 322.8 370.7 364.4 451.7 507.9
Current Asset 374.4 470.5 504.4 565.9 642.2
Total assets 812.4 989.9 1,056.9 1,149.3 1,253.4
ST debt 134.0 160.7 144.5 129.8 116.7
Other l iabil ities 112.0 123.7 134.5 155.7 174.7
Current Liability 245.9 284.4 279.0 285.5 291.3
Shareholders' funds & MI 506.3 617.4 693.7 783.0 884.5
LT borrowings 26.0 38.3 34.4 30.9 27.8
Others 34.2 49.8 49.8 49.8 49.8
LT liabilities 60.2 88.1 84.2 80.7 77.6
Total Liabilities + equity 812.4 989.9 1,056.9 1,149.3 1,253.4
Cash Flow (RMmn)
FYE Dec 31 2011 2012 2013f 2014f 2015f
PBT 112.9 138.5 171.9 202.8 232.6
Adjustments (56.4) (55.0) (95.6) (113.5) (131.1)
Dep. & amortisation 40.3 45.1 46.9 49.1 52.2
Changes in WC (50.9) (35.7) 17.1 (66.1) (37.3)
Operational cash flow 45.9 92.9 140.3 72.4 116.4
Capex (39.8) (82.8) (80.0) (80.0) (80.0)
Others (7.6) 2.5 0.0 0.0 0.0
Investment cash flow (47.4) (80.4) (80.0) (80.0) (80.0)
Debt raised/(repaid) (11.8) 43.1 (20.2) (18.1) (16.3)
Equity raised(repaid) (0.4) 0.0 0.0 0.0 0.0
Others (19.2) (9.7) 0.0 0.0 0.0
Financial cash flow (31.5) 33.4 (20.2) (18.1) (16.3)
Net cash flow (32.9) 45.9 40.1 (25.7) 20.1
Opening cash 80.7 47.7 93.7 133.8 108.1
Forex 0.0 0.0 0.0 0.0 0.0
Closing cash & cash equivalents 47.7 93.7 133.8 108.1 128.2
12-Aug-13
Page 15 of 15
TA SecuritiesA Member of the TA Group
Ratios
FYE Dec 31 2011 2012 2013f 2014f 2015f
Profitability ratios
ROE (%) 19.1 18.6 20.7 21.5 21.7
ROA (%) 11.3 11.3 13.0 14.1 14.7
PBT Margins (%) 10.4 11.2 13.5 13.2 13.4
Liquidity ratios
Current ratio (x) 1.5 1.7 1.8 2.0 2.2
Quick ratio (x) 0.9 1.1 1.2 1.3 1.4
Leverage ratios
Total liabilities / equity(x) 0.6 0.6 0.5 0.5 0.4
Net debt / Equity (x) 0.2 0.2 0.1 0.1 0.0
Growth ratios
Sales (%) 4.1 13.2 3.1 20.7 12.7
Pretax (%) (19.7) 22.6 24.2 18.0 14.7
Total assets (%) 4.5 21.8 6.8 8.7 9.1
Table 5: Peers Comparison
Price TP Mkt Cap FY13 FY14 FY13 FY14 FY13 FY14
(RM) (RM) RM mn (sen) (sen) (%) (%) (x) (x)
Top Glove 6.08 7.10 BUY 3,769.0 33.6 38.8 2.7 15.4 18.1 15.7
Supermax 2.30 2.70 BUY 1,562.2 19.0 24.2 6.4 27.3 12.1 9.5
Hartalega 6.85 7.40 HOLD 5,027.9 32.0 36.4 (42.0) 13.8 21.4 18.8
Kossan 6.04 6.80 BUY 1,924.3 41.5 48.5 29.7 17.1 14.6 12.4
Simple average 3,453.0 28.2 33.2 (11.0) 18.8 17.2 14.7
EPS EPS Growth PER
FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14
(x) (x) (x) (x) (%) (%) (sen) (sen) (%) (%)
Top Glove 2.2 2.4 2.8 2.5 15.6 16.6 17.2 19.8 2.8 3.3
Supermax 1.3 1.5 1.7 1.5 14.7 16.8 5.7 7.3 2.5 3.2
Hartalega 1.0 1.2 6.6 5.5 33.8 31.8 14.5 16.4 2.1 2.4
Kossan 2.1 2.4 2.9 2.5 20.7 21.5 18.7 21.8 3.1 3.6
Simple average 1.5 1.7 3.7 3.2 21.4 21.7 12.5 14.5 2.5 2.9
NTA/Share Div yieldP/NTA ROE DPS
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may
have an interest in the securities and/or companies mentioned herein.
for TA SECURITIES HOLDINGS BERHAD(14948-M)
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048
(A Participating Organisation of Bursa Malaysia Securities Berhad)
Kaladher Govindan – Head of Research