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Result Note – Kossan (ADD, maintain) - Flat margins hamper 1HFY12 earnings growth




Affin Hwang Investment Bank Bhd


09 Oct 2012





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Below expectations Kossan reported 1HFY12 revenue of RM594.2m (+11.7% yoy), driven by: 1) higher volume sales and revenue growth of +11.2% yoy in the rubber gloves division, and; 2) stronger revenue contribution of +4.8% yoy in the technical rubber products (TRP) division. Average latex price in 1HFY12 declined by -26.1% yoy – consequently, the lower raw material costs, as well as improved production efficiency helped lift PBT margin in the TRP division by +3.1%-points yoy. However, PBT margin in the rubber gloves division fell by -0.4%-points yoy, which we suspect may be due to stronger price competition within the nitrile glove segment. Note that after Hartalega, Kossan is the most exposed to the nitrile glove segment (c. 40% of total gloves production). Overall, Kossan’s 1HFY12 EBITDA margin was relatively flat at 14.3% vs. 14.5% in 1HFY11. Factoring in a higher effective tax rate (22.1% vs. 18.1% in 1HFY11), 1HFY12 net profit grew by a weaker +3.8% yoy to RM45.6m. Results were below expectations, accounting for only 42% and 40% of our and consensus expectations. The variance was largely due to lower-than-expected revenue and margins from stronger price competition.

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