KUALA LUMPUR: AmResearch has reaffirmed its Buy call on Kossan Rubber
with a fair value of RM8.40 a share to reflect a PE target of 27 times, which is on par with Hartalega Holdings’ PE given its comparable operational and financial performance.
In a note on Tuesday, the research house said it Buy rating is premised on superior earnings growth and track record, margin expansion on the back of an improving product mix and operating efficiency, favourable USD:RM exposure and upcoming restructuring of its TRP division.
"While there was a slight commercial production delay in the group’s newly constructed Plant 2 and 3 we do not expect this to significantly impact earnings as it should be more than offset by its margin improvements," it said.
The new capacity, which will be commissioned progressively, will result in a stronger 2HFY15 for Kossan and help boost full-year FY15F earnings by 40% YoY.
"Bearing in mind the higher base, we are projecting an FY16F earnings growth of 12% backed by the full commissioning of its three new plants and overhauls at its older facilities.
"These should collectively add 3.5 bil pcs (+16%) to Kossan’s capacity. Demand for Kossan’s products remains robust, with the capacity from all its plants having been contracted for," it noted.
With current cost headwinds still manageable, Kossan’s margins would enlarge by 2-3ppts for FY15F-FY17F.
This will also be supported by its better product mix, higher automation and greater efficiency and productivity from the revamp of older lines.
Although Kossan’s share price had performed exceedingly well YTD (outperforming its peers and market by 17% and 63% respectively), the stock has further upside given the imminent US rate hike as well as potential moves by management to reward its shareholders given its improving cash flows.
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