Wednesday, August 21, 2013

Positive outlook keeps Censof at market perform


Published: Tuesday August 20, 2013 MYT 12:00:00 AM 
Updated: Tuesday August 20, 2013 MYT 6:41:56 AM



CENSOF HOLDINGS
By Kenanga Research
Target price: RM0.61
Market perform (maintained)

CENSOF Holdings’ net profit of RM2.7mil for the first half of 2013 was below expectations, accounting for only 16.4% and 18.3% of our and the street’s full-year estimates of RM16.4mil and RM14.7mil, respectively.

Higher administration and finance costs were the key factors for its weak result. No dividend was announced during the quarter as expected.

Year-on-year, the revenue in the period rose to RM25.5mil (+16.9%) on higher revenue contribution from its new training solutions segment, coupled with higher recognition of maintenance revenue.

Nonetheless, despite the rising topline, the net profit dropped to RM2.69mil (-9.7%) due to higher administration expenses and financing cost as a result of recent corporate exercises for issuance of redeemable convertible notes (RCN) and private placement.

Quarter-on-quarter, financial year 2013 second-quarter revenue improved by 25.9% to RM14.2mil from RM11.3mil mainly due to the partial billing for the Social Security Organisation (Socso) project and higher revenue contribution of RM1.6mil (versus RM1mil previously) from the training solutions segment.

However, the higher cost of sales of RM9.7mil (+74%) and administration costs of RM3.2mil (versus RM2.6mil previously) lowered the group’s profit before tax margin substantially to 5.4% as compared with 20.9% in the first quarter 2013. We believe Censof’s long term outlook remains encouraging, underpinned by potential catalyst from goods and services tax (GST) development in the upcoming Budget 2014, potential growth prospect from positive merger and acquisition synergy and continued projects/contracts flow from various government agencies. Our latest meeting with Censof’s management indicated that there could be a one to two quarters delay in completing Socso projects (worth RM33.5mil), targeted to be completed by this month, due mainly to timing mismatch.

The delay may potentially cause higher operating costs in both labour and administration expenses, compelling us to lower our estimated net profit for financial years 2013 and 2014 by 14.9% to 22.0% to RM12.8mil and RM15.4mil, respectively.

We maintain “market perform”.

Despite an uninspiring set of first half 2013, our Censof’s target price is only trimmed marginally to RM0.61 (versus RM0.62 previously) as we have raised our targeted financial year 2014 price-earnings ratio to 15.5 times (+1 standard deviation) from average 12.2 times previously propelled by exciting prospects from potential GST development in the upcoming 2014 Budget, which may serve as an earnings growth catalyst.


KOSSAN RUBBER INDUSTRIES
By CIMB Investment Bank
Target price: RM7.94
Outperform (maintained)

DURING our recent meeting, we gathered that Kossan should enjoy higher margins as it expands its new manufacturing model and nitrile production.

Also, special purpose gloves (SPV) and potential technical rubber product (TRP) acquisitions would buffer competitive pressure.

Kossan remains an “outperform” and our top pick, with the catalysts being strong demand, widening margins and diversification efforts. We raise our earnings per share forecasts for financial years 2013 to 2015 by 7% to 11% for a better product mix, higher plant efficiency and an assumed 5 billion piece rise in capacity in financial year 2014.

We also apply a higher calendar year 2014 target price-earning ratio of 14 times (20% discount to Hartalega’s target instead of 30%) to reflect its higher margins and diversification moves. We met up with Kossan’s management recently and left the meeting with renewed optimism on the stock.

The company plans to expand its new manufacturing model (more focused manufacturing lines with single specification for single customer) in its new plant. To expand its technical rubber product business, it also plans to acquire companies.

We were introduced to its new product “InTouch glove” which is a grade below surgical glove and a cheaper alternative for minor surgery. While we take a positive view of its moves, they are not entirely surprising as it is the norm for manufacturing companies to continuously increase production capacity and manufacture in the most efficient way.

The use of both the new manufacturing model and the old one (shorter lines with multiple specifications for multiple customers) will reduce downtime while mitigating the risk of over-reliance on a few large customers.

Hence, it helps to increase the group’s margin at lower risk.

Being cheaper than surgical glove, InTouch gloves should provide a gateway to emerging markets.

Investors should accumulate the stock as its valuation remains attractive.

The new manufacturing model, the rising proportion of nitrile sales and continuous diversification efforts will help to expand margins and lower competitive risk.

On Aug 26, Kossan will release its second-quarter results, which should be broadly in line with our revised forecast.

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