We initiate coverage on Kossan with a BUY and PT of RM4.40/share: (1) Share price has been a laggard against peers, despite strong fundamentals. Valuation is attractive at 7.3x FY09E PE, 17-38% discount to Top Glove and Hartalega. 18% EPS CAGR over FY09-10 is higher than consensus estimate of 12% for Top Glove. (2) We expect margin expansion in 2Q08 on lower gas prices and higher production of nitrile gloves. (3) FCF will rise from 12% in FY09 to 18% in FY11 and this could lead to higher dividend payout. We estimate 11sen/share net DY in FY09, implying a net DY of 3.4%.
We are Positive on the glove manufacturing sector: (1) Sales of medical grade gloves are recession-proof. Global consumption of glove continues to grow at 8-10% per annum. (2) Strong performance from listed glove-makers in the past 4 quarters proves that raw material price volatility and forex volatility, although a risk, is manageable.
Newsbreak
M’sia and S’pore expands air services agreement
PBBank 1Q net profit falls 18% yoy to RM589m
Prime Minister to launch Proton’s MPV Exora today
Top Glove looking to expand more into China and India
POSM offering new hospital insurance coverage product
KFC plans to expand network to 482 stores with addition of 40 stores this year
Economics
US: Mar retail sales unexpectedly plunged 1.1% MOM (Feb: +0.3%), declining for the first time in 3 months, leaving a shadow over recent signs of improvement in the slumping economy.
US: Mar producer prices fell 1.2% MOM (Feb: +0.1%) after two straight months of gains on the back of falling energy costs, though core prices remained steady.
US: Feb business inventories fell 1.3% MOM (Jan: -1.1%) led by the drop in auto dealer inventories and marking its sixth straight monthly decline, signaling the lack of confidence in future demand.
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