KENANGA RESEARCH

19 February 2013

Quick Bites

Kossan Rubber Industries

Acquiring land for expansion
News In an announcement to Bursa Malaysia, Kossan Rubber Industries (Kossan) said it is buying a piece of freehold industrial land measuring approximately 56 acres located in Batang Berjuntai, Kuala Selangor for RM35.4m or RM14.50 per sq feet. The acquisition is expected to be completed by 1QFY2014. This acquisition makes sense to us and is in line with Kossans strategy to replenish its land bank in order to build more gloves production lines, which are presently running at full capacity. We believe the land acquisition price is fair after checking with several sources that the industrial land prices in the vicinity of Batang Berjuntai are between RM13 to RM16 per sq feet. Amplifying the strong demand for nitrile gloves, the land is highly likely to be used to house plants for the production of nitrile gloves. Note that Kossans recent new nitrile capacity of 1.3b pieces of gloves has been mostly taken up by confirmed buyers. For illustrative purposes, the RM35.4m acquisition will not have a material impact on Kossans net debt and net gearing of RM84m and 0.2x as at 30 Sept 2012. We do not have sufficient details and numbers to quantify future earnings enhancement to our earnings forecasts at this juncture. 4QFY12 results preview. Kossans commercial operation of its nine-line production plant, which produces 1.3b nitrile gloves p.a. in total, has hit maximum capacity in 4Q2012. Its production line to produce 0.6b pieces of surgical gloves meanwhile is expected to be ready by end-Feb 2013. We expect a 4QFY12 net profit of between RM29.0m and 31.0m, bringing the full-year FY12 profit to RM104.0mRM106.0m, underpinned by new capacity and lowerthan-expected input latex prices. No changes to our forecasts. Maintain OUTPERFORM Kossan is trading at 9.0x FY13 earnings compared to Topglove and Supermax, which are at 15.0x their FY13 earnings. The valuation gap should narrow as (i) Kossan moves up the value chain by offering higher margin surgical and clean room gloves and (ii) the fact that Kossans product mix contains lesser natural rubber glove, which is more sensitive to the movement in latex prices. Going by the recent acquisition of both Adventa and Latexx Partner at PERs of between 13.0x and 16.0x, Kossan appears more attractive at its current valuations. This is because Kossan has a bigger market capitalisation and earnings base compared with both Adventa and Latexx Partner. Our TP is based on a PER of 10.0x, representing a -0.5 standard deviation below its 6-year average, over our FY13 EPS forecast of 36.4 sen. Higher than expected input raw material cost Lower than expected volume sales.
3.80

OUTPERFORM
Price: Target Price:
Share Price Performance

RM3.24 RM3.64

3.60

3.40

Comments

3.20

3.00

2.80 Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

KLCI YTD KLCI chg YTD stock price chg Stock Information Bloomberg Ticker Market Cap (RM m) Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily vol: Free Float Beta Major Shareholders KOSSAN HOLDINGS S/B KWSP EPF Summary Earnings Table FYE Dec (RMm) 2012E Turnover 1192.2 EBIT 139.7 PBT 132.8 Net Profit (NP) 105.8 Core NP 105.8 Consensus (NP) Earnings Revision EPS (sen) 33.1 EPS growth (%) 15.8 DPS (sen) 7.0 NTA/Share (RM) 1.8 PER 9.8 Price/NTA (x) 1.8 Net Gearing (x) 0.1 Dividend Yield (%) 2.2

1,620.93 -4.0% -3.6%

KRI MK Equity 1,032.3 318.6 3.50 2.97 193,241 36% 0.8

Outlook

51.2% 7.6% 5.0%

Forecast Rating Valuation

2013E 1297.0 151.7 146.1 116.4 116.4 117.8 N.A. 36.4 10.0 7.0 2.2 8.9 1.5 0.0 2.2

2014E 1475.2 175.2 171.5 136.6 136.6 134.3 N.A. 42.7 17.4 7.0 2.6 7.6 1.3 -0.1 2.2

The Research Team research@kenanga.com.my +603 2713 2292

Risks

PP7004/02/2013(031762)

KENANGA RESEARCH

Kossan Rubber Industries

Income Statement FY Aug (RM m) 2010A Revenue 1046.9 EBITDA 181.7 Depreciation -34.2 Operating Profit 147.5 Other Income 1.1 Interest Exp -8.0 Associate 0.0 Exceptional Items 0.0 PBT 140.7 Taxation -26.9 Minority Interest -0.4 Net Profit 113.4 Core Net Profit 113.4 Balance Sheet FY Aug (RM m) Fixed Assets Intangible Assets Other FA Inventories Receivables Other CA Cash Total Assets Payables ST Borrowings Other ST Liability LT Borrowings Other LT Liability Minorities Int. Net Assets Share Capital Reserves Equity Financial Data & Ratios FY Aug (RM m) 2010A Growth Turnover (%) 24.3% EBITDA (%) 41.3% Operating Profit (%) 55.3% PBT (%) 63.9% Core Net Profit (%) 70.0%

19 February 2013

2011A 1090.0 159.8 -40.3 119.5 1.6 -7.5 0.0 0.0 113.6 -21.8 -0.4 91.4 91.4

2012A 1192.2 187.2 -47.5 139.7 1.3 -8.2 0.0 0.0 132.8 -26.6 -0.4 105.8 105.8

2013E 1295.5 203.4 -51.9 151.5 2.0 -7.6 0.0 0.0 145.8 -29.2 -0.5 116.2 116.2

2014E 1475.0 231.6 -56.4 175.2 3.4 -7.1 0.0 0.0 171.4 -34.3 -0.5 136.6 136.6

2011A 4.1% -12.1% -19.0% -19.2% -19.4%

2012A 9.4% 17.1% 16.9% 16.9% 15.8%

2013E 8.7% 8.7% 8.4% 9.8% 9.8%

2014E 13.9% 13.9% 15.7% 17.6% 17.6%

Profitability (%) EBITDA Margin Operating Margin PBT Margin Core Net Margin Effective Tax Rate ROA ROE DuPont Analysis Net Margin (%) Assets Turnover (x) Leverage Factor (x) ROE (%) Leverage Debt/Asset (x) Debt/Equity (x) Net Cash/(Debt)

17.4% 14.1% 13.4% 10.8% 19.1% 14.6% 25.6%

14.7% 11.0% 10.4% 8.4% 19.2% 11.3% 18.4%

15.7% 11.7% 11.1% 8.9% 20.0% 11.4% 17.9%

15.7% 11.7% 11.3% 9.0% 20.0% 11.5% 16.7%

15.7% 11.9% 11.6% 9.3% 20.0% 11.9% 16.6%

2010A 409.5 0.9 0.3 123.7 150.5 1.0 91.5 777.3 113.1 150.1 9.5 27.7 32.3 2.0 442.6 159.9 282.7 442.6

2011A 433.0 4.9 0.1 163.8 157.6 1.4 51.6 812.4 103.5 134.0 8.5 26.0 34.2 9.5 496.8 159.9 337.0 496.8

2012A 481.8 4.9 0.1 179.1 172.4 1.2 91.2 930.7 113.2 140.0 9.3 26.0 41.3 9.9 591.0 159.9 431.2 591.0

2013E 479.8 4.9 0.1 194.7 187.3 1.3 139.0 1007.2 123.0 110.0 10.1 26.0 32.1 10.4 695.6 159.9 535.7 695.6

2014E 473.4 4.9 0.1 221.6 213.3 1.5 237.7 1152.6 140.0 120.0 11.5 26.0 23.5 10.9 820.6 159.9 660.8 820.6

10.8% 0.7 1.8 25.6%

8.4% 0.7 1.6 18.4%

8.9% 0.8 1.6 17.9%

9.0% 0.8 1.4 16.7%

9.3% 0.8 1.4 16.6%

0.2 0.4 -86.2

0.2 0.3 -108.3

0.2 0.3 -74.8

0.1 0.2 3.0

0.1 0.2 91.7

Valuations EPS (sen) NDPS (sen) BVPS (RM) PER (x) Net Div. Yield (%) P/BV (x) 35.5 10.0 1.4 9.1 3.1 2.3 28.6 7.0 1.6 11.3 2.2 2.1 33.1 7.0 1.8 9.8 2.2 1.8 36.3 7.0 2.2 8.9 2.2 1.5 42.7 7.0 2.6 7.6 2.2 1.3

Cashflow Statement FY Aug (RM m) 2010A Operating CF 137.8 Investing CF (39.4) Financing CF (35.2) Change In Cash 63.2 Free CF 52.7

2011A 45.9 (47.4) (31.5) (32.9) 6.1

2012A 134.3 (80.0) (10.8) 43.5 54.3

2013E 148.7 (50.0) (50.8) 47.9 98.6

2014E 158.9 (50.0) (10.2) 98.7 109.2

Source: Kenanga Research

Fwd PER Band
5 PRICE (RM) PER 6.6 x PER 8.1 x PER 9.6 x PER 11.1 x PER 12.6 x

Fwd PBV Band

5.5 PRICE (RM) PBV 1.3 x PBV 1.7 x PBV 2.1 x PBV 2.5 x PBV 2.9 x 5

4.5

4.5
4

4
3.5

3.5
3

3
2.5

2.5

1.5

1.5

1 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13

1 Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

Source: Kenanga Research

Page 2 of 3

KENANGA RESEARCH

Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stocks Expected Total Return is MORE than 10% (An approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%) MARKET PERFORM : A particular stocks Expected Total Return is WITHIN the range of 3% to 10% UNDERPERFORM : A particular stocks Expected Total Return is LESS than 3% (An approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate)

Sector Recommendations*** OVERWEIGHT NEUTRAL UNDERWEIGHT : A particular stocks Expected Total Return is MORE than 10% (An approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%) : A particular stocks Expected Total Return is WITHIN the range of 3% to 10% : A particular stocks Expected Total Return is LESS than 3% (An approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate)

***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: www.kenangaresearch.com Chan Ken Yew Head of Research

Page 3 of 3

KENANGA RESEARCH