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RUBBER PRODUCTS

KOSSAN RUBBER
(KRI MK, KRIB.KL)

15 July 2013

Better days ahead
Company report
Cheryl Tan cheryl-tan@ambankgroup.com +603 2036 2333
Price Fair Value 52-week High/Low Key Changes Fair value EPS YE to Dec Revenue (RMmil) Core net profit (RMmil) EPS (Sen) EPS growth (%) Consensus EPS (Sen) DPS (Sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) Book value (RM/share) P/BV (x) ROE (%) Net Gearing (%) Major Shareholders 318.6 1,809.8 1.90 3.0 18.0 12.5 Kossan Holdings Sdn Bhd (51.2%) KWAP (7.6%) 30.4 4.0 3mth 54.4 49.2 6mth 65.1 59.0 12mth 79.8 69.9 FY12 1,234.0 102.2 32.1 14.6 32.1 12.0 17.7 10.1 2.1 18.0 12.5 FY13F 1,415.4 134.4 42.2 31.6 39.1 16.0 13.5 8.0 2.8 20.6 8.3 FY14F 1,622.7 160.8 50.5 19.6 44.9 19.0 11.3 6.6 3.3 21.3 1.3 FY15F 1,875.4 190.2 59.7 18.2 51.0 24.0 9.5 5.6 4.2 21.7 n/a RM5.68 RM6.30 RM5.70/RM3.00

BUY
(Unchanged)
Rationale for report: Company Update
Investment Highlights

We maintain our BUY recommendation on Kossan Rubber Industries (Kossan) with a higher fair value of RM6.30/share to reflect our upwards earnings revision for FY13F-FY15F of 14%-22% and the rolling forward of our base year to FY14F. We continue to peg Kossan to a PE of 12.5x. Our bullish view on Kossan is underpinned by:- (1) its growing production capacity (FY13F: +20%; FY14F: +30%) amid robust global rubber glove demand (FY13F: +10%-15%, 1Q13 sales volume: +29% YoY); (2) its focus on differentiation and its move up the value chain through product innovations; (3) upbeat prospects for its technical rubber products (TRP) division; and (4) lower production costs. The group’s FY13F earnings will be bolstered by the March 2013 commissioning of its 9 surgical glove lines (+700mil pcs) and spillover capacity from the end-FY12 commercialisation of 9 nitrile glove lines (+1.5bil pcs). We understand that plans are afoot for the construction of 3 nitrile glove plants by May 2014 which will collectively expand Kossan’s installed capacity by ~5bil pcs (or 30%). This potentially translates into additional revenue of ~RM400mil. We gather that Kossan has sold forward the bulk of its new capacities. In the medium term, Kossan’s capacity growth will be centred on its recently acquired 56-acre land in Batang Berjuntai, where it plans to build 6-8 high productivity plants to achieve an installed capacity of 32 bil pcs per annum by 2018 (5-year CAGR of 15%). We are also encouraged to learn that management is planning to accelerate growth of its TRP business (~12% of revenue), backed by a strong foreign demand for infrastructure rubber products and automotive component parts. The construction of its Jakarta plant is slated to begin in the next 1-2 months. Factoring in lower production costs due to a lower latex price assumption (RM6.00/kg from RM6.50/kg), increased plant efficiency as well as greater contribution from higher margined products (eg. clean room and surgical gloves), we expect Kossan’s EBITDA margin to expand by 1-2ppts to ~17% for FY13F-FY14F. All in, we have incorporated capex of RM75mil which we believe can be internally funded given Kossan’s sound operating cash flows and manageable net gearing (1Q13: 0.1x). Our revised gross DPS forecasts of 16 sen for FY13F and 19 sen for FY14F are premised on a 38%-40% payout ratio. Although yields have declined following its strong share price performance (YTD: +49% vs FBM KLCI’s +5%), its 3-year average of 3.5% is the highest among its peers. Nonetheless, we believe the stock still has legs on the upside given the group’s solid fundamentals, improving liquidity (including possibility of bonus and warrants in FY13F) and still conducive operating environment.

Free Float (%) Avg Daily Value (RMmil) Price performance Absolute (%) Relative (%)
6.00


1,646 I n d e x P 1,414 o i n t s

4.50

) M 3.00 R (

• •

1.50

1,182

0.00

J u l 0 8

J a n 0 9

J u l 0 9

J a n 1 0

J u l 1 0
Kossan

J a n 1 1

J u l 1 1
FBM KLCI

J a n 1 2

J u l 1 2

J a n 1 3

950


PP 12247/06/2013 (032380)

0 300.0 100.0 200.0 18.0 16.0 150.0 17.0 12.000 20.0 Turnover (RM mil) Pretax Profit (RM mil) EBITDA Margin (%) 20.0 15.000 15.0 0.000 5.0 14.0 13. AmResearch AmResearch Sdn Bhd 2 . AmResearch CHART 2 : KOSSAN’S INSTALLED CAPACITY (MIL PCS) – HISTORICAL AND PROJECTED 35.000 10. Bursa Malaysia.Kossan Rubber Industries 15 July 2013 CHART 1 : QUARTERLY EARNINGS PERFORMANCE 350.0 19.0 250.000 25.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Company.0 10.000 30.000 0 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F Source: Company.0 50.0 11.

00 5. AmResearch.700 1.50 5. AmResearch AmResearch Sdn Bhd 3 . MRB NBR Prices (USD/tonne) .400 1.200 1.00 6.000 NR Prices (RM/kg) .50 6.Kossan Rubber Industries 15 July 2013 CHART 3 : LATEX AND NITRILE PRICE TREND 8.100 1.9 Source: Company.0 2005 Bonus issue 1 for 5 74.800 1.RHS CHART 4 : DIVIDEND PAYOUT RATIO (%) 50 45 40 35 30 25 20 15 10 5 0 43 37 33 23 25 38 38 TABLE 1: PREVIOUS CORPORATE EXERCISES 40 40 Financial Year Reward Paid-up (Million shares) 1996 IPO 19.9 1999 Bonus issue 8 for every 5 51.7 2003 Bonus issue 1 for every 5 62.4 2005 ESOS 79.9 2010 Bonus issue 1 for 1 159.500 1.50 7.00 7. AmResearch Source: Company.300 1.LHS Source: Company.600 1.00 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Holding relatively steady of late 1.

4 15.0 J u l 1 0 O c t 1 0 J a n 1 1 CHART 6 : PE BAND CHART +1s Avg -1s A p r 1 1 J u l 1 1 O c t 1 1 J a n 1 2 A p r 1 2 J u l 1 2 O c t 1 2 J a n 1 3 A p r 1 3 AmResearch Sdn Bhd 4 .0 16.Kossan Rubber Industries 15 July 2013 CHART 5 : PB BAND CHART 4.2 1.4 1.0 3.2 Avg +1s 10.8 ) 9.8 2.6 12.0 6.2 2.6 5.0 J u l 0 8 O c t 0 8 J a n 0 9 A p r 0 9 J u l 0 9 O c t 0 9 J a n 1 0 A p r 1 0 J u l 1 0 O c t 1 0 J a n 1 1 A p r 1 1 J u l 1 1 O c t 1 1 J a n 1 2 A p r 1 2 J u l 1 2 O c t 1 2 J a n 1 3 A p r 1 3 1.8 ) x ( 2.4 13.6 -1s 3.4 x ( 8.

1 701.0 0.0 160.8 2.5 1.0 35.7 2012 13.8 0.5 1.0 4.7 6.0 (5.9 0.0 793.9 47.3 (75.8) 0.9 4.8) 0.5 (33.4 13.2 102.0 3.2 60.4) 45.0 (0.1 160.0 (55.9) 191.0 565.8 56.2 9.3) (102.3 10.8 0.0) 47.0 203.8 149.7) 0.5 0.0 (80.2 4. AmResearch estimates 2011 1.9 16.9 (39.4 134.0 5.0 (14.1 519.4 4.4) 89.3 40.2 52 43 21 AmResearch Sdn Bhd 5 .5 (37.0 (5.7) (2.9 51.3 37.0 37.8 93.0 176.6 53.5) (9.0 48.9 (53.9 0.8 940.0 59.6 17.0) 1.3) 98.1 604.0 0.0 48 48 23 2012 1.5 201.4 88.1 14.234.3 313.5 206.5 0.3 (21.9 37.4 2013F 519.2 8.4 318.1 545.4 235.7 11.8 470.9 (50.4 350.9) 80.4 0.9 (41.3 4.2 478.6 249.8 2.2) 0.9 12.622.0 138.9) 118.6 63.7 181.4 74.0 211.0 3.415.0) 1.90 2012 138.0) 1.5 68.1) 0.4 99.1 115.2 48.090.1 524.8 287.5 245.8 (55.8 23.3 8.5) 125.8 4.2 531.5 (70.3 22.1 2.7 2011 4.5 238.5 11.0) 57.0) (81.0 (3.7 47.6 (50.0 9. YE 31 Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders’ funds Minority interests BV/share (RM) Cash Flow (RMmil.9 0.7 (42.2 2.1 (40.7 52.0) 1.0 (73.0 0.6 15.0 40.9 17.7 87.0 66.9 55 43 21 2014F 1.5 45.2) 128.2 15.5) 32.8 2014F 540.0 159.2 190.8) 1.2 18.4 24.0 57.9 0.0 0.0 0.2 2012 514.9 0.6 50.9 18.1 (35.4 69.9 (45.5 2013F 14.2 0.7) (47.0 54.95 2015F 250.4 52 46 21 2013F 1.1 224.5) (32.875.0 4.0 250.9 810.0 134.3) 0.7 93.20 2013F 176.4) (121.5 0.8 1.0 (43.1) 143.7 43.6 99.0 12.8) 0.6 12.5 664.1 374.8 19.7) (31.2 (60.3 25.5 124.6 13.0 0. YE 31 Dec) Revenue EBITDA Depreciation Operating income (EBIT) Other income & associates Net interest Exceptional items Pretax profit Taxation Minorities/pref dividends Net profit Core net profit Balance Sheet (RMmil.3 51.9) (56.5) (8.8 24.6) 1.5 75.2 2015F 555.8 153.8 146.8 2.0 201.7 153.6 161.4 35.4 12.9 2.2 2011 473.2 152.4) 33.6) 102.1 n/a 10.3 2015F 15.54 2014F 211.8 24.5 9.0 188.3 258.3 284.0 (73.0 (14.2 89.8 160.Kossan Rubber Industries 15 July 2013 TABLE 1 : FINANCIAL DATA Income Statement (RMmil.1 560.3) 0.0 (10.0 (4.0) 92.0) 263.0 (68.9) 0.3 2014F 14.7) (1.6 53 44 21 2015F 1.0 0.4 157.0 33.3 (75.8 330.8 12.7) (55.2 55.4 45.7 24.9 (82.6 163.7 275.0 112.9 204.5) 222 0.0 190.1 (7.9 260.0 0. YE 31 Dec) Pretax profit Depreciation Net change in working capital Others Cash flow from operations Capital expenditure Net investments & sale of fixed assets Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Others Cash flow from financing Net cash flow Net cash/(debt) b/f Net cash/(debt) c/f Key Ratios (YE 31 Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rate (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company.0) 0.0 63.5 12.67 2011 112.4) (30.3 162.

3 1 6 2 The information and opinions in this report were prepared by AmResearch Sdn Bhd. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable.3 1 6 2 Printed by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bang unan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 0 3 ) 2 0 7 0 . For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 6 . This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities.2 4 4 4 ( r e s e a r c h ) F a x: ( 03 ) 2 07 8. The information herein was obtained or derived from sources that we believe are reliable.Kossan Rubber Industries 15 July 2013 Anchor point for disclaimer text box Published by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bang unan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 0 3 ) 2 0 7 0 . All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.2 4 4 4 ( r e s e a r c h ) F a x: ( 03 ) 2 07 8. No liability can be accepted for any loss that may arise from the use of this report. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. we do not represent that it is accurate or complete and it should not be relied upon as such. The investments discussed or recommended in this report may not be suitable for all investors.