1H11 results were disappointing, making up only 39% of our forecast and 37% of consensus estimates. As expected, no dividends were declared. We believe the poor results were due to volatile input costs and overcapacity in the sector. We are cutting our FY11-13 EPS forecasts by 15-16% as our utilisation assumptions were too optimistic. Our target price falls from RM3.87 to RM3.25, still based on a forward P/E of 9.1x or a 30% discount to Top Glove’s 13.1x benchmark P/E. We downgrade Kossan from Outperform to NEUTRAL. While valuations are cheap, we believe this is balanced by overcapacity and higher energy costs. Although Kossan has been our top pick since Apr 2011, the stock has underperformed the sector. Hartalega is now our top pick.
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