PP 7767/09/2010(025354)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su lts N ot e
27 August 2010
MARKET DATELINE

Kossan Rubber Industries Share Price

Fair Value
:
:
RM3.46
RM5.36
1H Core Net Profit Up 15.8% YoY Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (KOSSAN; Code: 7153) Bloomberg: KRI MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 837.0 66.8 20.9 37.5 202.2 9.2 - 3.1 0.45 36.5 3.5
2010f 1035.9 118.8 37.2 37.2 -0.8 9.3 37.0 2.4 0.18 29.0 1.5
2011f 1353.4 142.9 44.7 44.7 20.3 7.7 43.0 1.9 0.04 27.0 1.8
2012f 1485.1 150.9 47.2 47.2 5.6 7.3 48.0 1.5 0.00 22.5 2.1
# Excludes exceptional items
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

RHBRI Vs. Consensus

♦ Within expectations. Kossan’s 2QFY12/10 net profit of RM30.0m (flat Above
mom; +15.7% yoy) was within our and consensus expectations with 6M √ In Line √
core net profit of RM60.4m (+15.8% yoy) accounting for 51% and 52% of Below
our and consensus full-year forecasts respectively. As expected, no
Issued Capital (m shares) 319.7
dividend was declared for the quarter.
Market Cap (RMm) 1,106.3
♦ 2Q revenue fell 2.4% qoq … While sales volume remained flat qoq, Daily Trading Vol (m shs) 0.8
52wk Price Range (RM) 1.957-4.25
revenue fell by 2.4% qoq mainly due to the weakening of US$ against RM
Major Shareholders: (%)
(-4.0% qoq). Sales revenue for the TRP segment was also weaker due to
Kossan Holdings 51.1
weaker demand for its TRP products due to high raw material prices.
Asian Small Companies 5.2

♦ … but 1Q net profit remained flat qoq. 2Q10 core pre-tax margin
contracted by 0.7%-pts qoq largely on the back of the time lag in passing FYE Dec FY10 FY11 FY12
on the higher raw material prices (latex prices rose 3.1% qoq) and EPS chg (%) - - -
weakening US$ (-4.0% qoq). These, however, were offset by the stronger Var to Cons (%) 0.4 4.0 (1.7)
performance from the TRP segment, where 2Q profit for the TRP segment
PE Band Chart
jumped 16.3% qoq. Together with a lower effective tax rate of 16.9% (vs.
1Q10 effective tax rate of 21.4%), 2Q10 net profit managed to remain flat
PER = 11x
qoq. PER = 8x
PER = 5x
♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or
energy (natural gas) prices, which may result in margin squeeze; 2) an
appreciating RM against the US$; and 3) execution risk from capacity
expansion.

♦ Forecasts. No change to our earnings forecast for now. Relative Performance To FBM KLCI

♦ Investment case. Our indicative fair value is maintained at RM5.36,

which is based on unchanged target FY11 PER of 12x. We believe the Kossan
recovery in demand for its TRP products, in tandem with the gradual
recovery in the economy, and resilient demand for medical gloves, should
bode well for the stock. Kossan is currently trading at FY10 PER of 9.3x,
the cheapest among the other big-cap peers (e.g. Top Glove, Hartalega FBM KLCI
and Supermax). We continue to like Kossan for its well-regarded
management as well as for its prudent capacity expansion plans. We
reiterate our Outperform call on the stock.
David Chong, CFA
Please read important disclosures at the end of this report. (603) 92802179
david.chong@rhb.com.my

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Table 2. Earnings review

QoQ YoY 1H 1H YoY
FYE Dec (RMm) 2Q09 1Q10 2Q10 (%) (%) FY09 FY10 (%) Comments
196.8 262.8 256.5 (2.4) 30.4 399.1 519.3 30.1 Yoy growth due to higher revenue
Revenue from the glove segment stemming
from the upward adjustments to
selling prices to pass on the higher
raw material prices while sales volume
remained flat yoy.
EBITDA 39.4 49.6 46.6 (5.9) 18.3 80.9 96.2 18.9 Higher yoy contribution from both the
glove and TRP segments leads to
EBITDA margin expansion, which more
than offset the increase in latex prices
and weakening US$
Dep & amort (8.0) (8.6) (8.4) (2.4) 4.8 (16.3) (17.0) 4.6
EBIT 31.4 41.0 38.2 (6.7) 21.8 64.6 79.2 22.6
(2.1) (2.2) (2.0) (9.7) (7.3) (4.9) (4.1) (14.8) Total debt as at end-2Q10 was
Int exp RM201.5m against RM213.7m as at
end-1Q10 and RM174.7m as at end
2Q09.
Exceptionals (12.5) 0.0 0.0 nm nm (24.7) 0.0 nm 1Q09 and H109 EI relates to forex
hedging losses.
Pre-tax profit 16.8 38.8 36.3 (6.5) >100 35.0 75.0 >100

Core pre-tax 29.3 38.8 36.3 (6.5) 23.9 59.7 75.0 25.6
profit
Tax (3.2) (8.3) (6.1) (26.1) 94.6 (7.3) (14.4) 98.2

Minority interest (0.2) (0.1) (0.1) 19.0 (36.7) (0.3) (0.2) (27.3)
Net profit 13.4 30.4 30.0 (1.2) >100 27.5 60.4 >100

Core net profit 25.9 30.4 30.0 (1.2) 15.7 52.2 60.4 15.8

Margins (%)
EBITDA 20.0 18.9 18.2 18.5 20.3
EBIT 16.0 15.6 14.9 15.2 16.2
Pre-tax 8.5 14.8 14.1 14.5 8.8
Effective tax rate 6.8 11.6 11.7 11.6 6.9
Effective tax rate remained lower than
statutory rate due to availability of tax
Net profit 13.2 11.6 11.7 11.6 13.1 incentives.
Core net profit 20.0 18.9 18.2 18.5 20.3

Segmental revenue
175.3 236.7 231.0 (2.4) 31.8 358.6 467.7 30.4
Gloves
21.5 26.1 25.5 (2.3) 18.8 40.6 51.6 27.1 Lower qoq due to seasonality effects
while stronger yoy growth reflects the
TRP recovery in economic conditions.
196.8 262.8 256.5 (2.4) 30.4 399.1 519.3 30.1
Total
Segmental core pre-tax profits
Gloves 28.7 37.5 34.5 (7.4) 20.2 59.8 71.8 20.0 Lower qoq was due to the time lag in
passing on raw material cost and
weakening US$ against RM.
TRP 0.6 1.5 1.8 16.3 >100 (0.0) 3.3 >100 Yoy and 1HFY10 were higher due to
operating leverage effects as a result
of the increase in revenue
Total 29.3 38.8 36.3 (6.5) >100 59.7 75.0 >100

Segmental core pre-tax margins (%)

16.4 15.7 14.9 16.7 15.3
Gloves
TRP 2.7 5.8 6.9 (0.1) 6.4
Source: Company data, RHBRI

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Table 3 : Earnings Forecasts Table 4 : Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 837.0 1,035.9 1,353.4 1,485.1 Avg capacity (bn pcs) 11.8 14.1 14.1
Turnover growth (%) 19.1 23.8 30.6 9.7 Utilisation rate (%) 93.0 90.0 95.0
Avg selling price (RM) 78.9 80.7 82.5
EBITDA 183.6 190.4 226.2 238.2
EBITDA margin (%) 21.9 18.4 16.7 16.0

Dep & amort (34.0) (29.6) (33.3) (34.4)

EBIT 149.5 160.9 192.9 203.9

EBIT margin (%) 17.9 15.5 14.3 13.7
Net Interest (9.1) (6.8) (7.5) (8.1)
Associates 0.0 0.0 0.0 0.0
EI (53.0) 0.0 0.0 0.0

Pretax Profit 87.4 154.1 185.4 195.8

Tax (20.1) (35.3) (42.5) (44.8)
Minorities (0.5) 0.0 0.0 0.0
Net Profit 66.8 118.8 142.9 150.9
Core Net Profit 119.8 118.8 142.9 150.9
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and
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have an interest in the securities mentioned by this report.

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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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subject to the duties of confidentiality, will be made available upon request.

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