Result Update
For QE31/3/2013, Kossan's net profit increased 12% q-o-q or 51% y-o-y to RM33 million while revenue increased 2% q-o-q or 13% y-o-y to RM327 million. Bottom-line increased q-o-q due to higher pre-tax profit contribution from the Gloves division (from RM33 million to RM40 million) which more than offset the drop in pre-tax profit contribution from the Technical Rubber Products division (from RM7 million to RM4 million). This improved performance for the Gloves division is partly contributed by the increased output capacity utilization achieved from its research and development on machines optimization and also slight decrease in the price of raw materials.
Table: Kossan's last 8 quarterly results
Kossan's steady improvement in top-line & bottom-line is indeed very encouraging. It as managed to bring its pre-tax profit margin back up to the high of 14% that was enjoyed in FY2010. This is a testimonial to its efficient production process.
Chart 1: Kossan's last 27 quarterly results
Valuation
Kossan (closed at RM4.06 yesterday) is now trading at a PE of 11.3 times (based on last 4 quarters' EPS of 36 sen). I believe Kossan should trade at the same PE multiple of 17 times enjoyed by the top two rubber gloves producers (Harta & Topglov). Thus, I believe Kossan may see an upside of 40-50% over the next 12 months due to PE expansion.
Technical Outlook
Kossan is in an uptrend line with support at RM3.30. It has just broken above its horizontal resisatnce at RM4.00. With this breakout, Kossan's uptrend may accelerate.
Chart 2: Kossan's weekly chart as at Mar 28, 2013_9.30am (Source: Quickcharts)
Conclusion
Based on improved financial performance, attractive valuation & positive technical outlook, Kossan is a good stock for long-term investment. It would now be my top pick for the rubber glove sector.
Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Kossan.
4 comments:
Hi Alex,
How about supermx? Seem like it is forming a triangle
Hi bo keong
Supermx is in a triangle, with upside resistance at RM2.10 & downside support at RM1.90. Its recent high was RM2.20 in early April.
It is trading at a trailing PE of 11 times (like Kossan). Unlike Kossan, Supermx's profit margin has been sliding in the past 2 quarters. This may change in QE31/3/2013 which has yet to be announced. We will wait & see.
Hi Alex,
What is the main reason the profit margin of supermx is sliding? I am seeing they are spending more on building up its marketing team (higher cost) and building up its inventory in US HQ. But, in longer term wise, selling at its own brand will be giving more profit margin?
Hi andyhard
Supermx's strategy is one way of getting a better margin for your products. However, the cost of doing so may be prohibitive. If you have a range of products to selling (say, surgical gloves, condoms, etc) then the cost of setting overseas branches may be justified. Otherwise, the high selling cost may not be recovered by the volume sold.
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