AmResearch maintains Buy on Kossan, raises fair value to RM5.85

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KUALA LUMPUR (Sept 17): Am Research has maintained its Buy rating on Kossan Rubber Industries Bhd at RM4.34 with a higher fair value of RM5.85 (from RM5) post revisions to its FY14F-FY15F earnings estimates and the rolling forward of our valuation base to FY15F.

In a note Wednesday, AmResearch analyst Cherly Tan said her fair value was based on a PE of 17x.

Tan said following her recent meeting with Kossan’s management, she cut her FY14F earnings estimate by 10% to RM162 million to account for a 6-month delay in the commissioning of its new production lines.

At the same time, Tan said she have tweaked her FY15F earnings upwards by 4% in line with its improving margins.

“Notwithstanding the near-term setback, Kossan remains our top sector pick given its:- (1) superior FY14F-FY16F earnings CAGR of 23% (double that of its peers’); (2) margin expansions (+2-3ppts); (3) booming TRP division; and (4) undemanding valuations.

“We believe that Kossan’s earnings growth will continue to be capacity-driven, underpinned by its target to have an installed capacity of 32 bil pcs by 2017,” she said.

Tan said unlike its peers who were hinting at demand constraints, pricing pressures, and margin risk, Kossan does not appear to be experiencing such issues.

She sadi Kossan’s utilisation rate remains high at more than 82% and its ASP has been fairly stable.