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RUBBER PRODUCTS
 
KOSSAN RUBBER
(KRI MK, KRIB.KL)
15 July 2013
Better days ahead
Company report
BUY
Cheryl Tan
cheryl-tan@ambankgroup.com +603 2036 2333
(Unchanged)
Rationale for report: Company Update
Price RM5.68 Fair Value RM6.30
52-week High/Low RM5.70/RM3.00
Key Changes
Fair value
 EPS
 
YE to Dec FY12 FY13F FY14F FY15F
Revenue (RMmil) 1,234.0 1,415.4 1,622.7 1,875.4 Core net profit (RMmil) 102.2 134.4 160.8 190.2 EPS (Sen) 32.1 42.2 50.5 59.7 EPS growth (%) 14.6 31.6 19.6 18.2 Consensus EPS (Sen) 32.1 39.1 44.9 51.0 DPS (Sen) 12.0 16.0 19.0 24.0 PE (x) 17.7 13.5 11.3 9.5 EV/EBITDA (x) 10.1 8.0 6.6 5.6 Div yield (%) 2.1 2.8 3.3 4.2 ROE (%) 18.0 20.6 21.3 21.7 Net Gearing (%) 12.5 8.3 1.3 n/a
Stock and Financial Data
Shares Outstanding (million) 318.6 Market Cap (RMmil) 1,809.8 Book value (RM/share) 1.90 P/BV (x) 3.0 ROE (%) 18.0 Net Gearing (%) 12.5 Major Shareholders Kossan Holdings Sdn Bhd (51.2%) KWAP (7.6%) Free Float (%) 30.4 Avg Daily Value (RMmil) 4.0
Price performance 3mth 6mth 12mth
Absolute (%) 54.4 65.1 79.8 Relative (%) 49.2 59.0 69.9
950 1,182 1,414 1,646 0.001.503.004.506.00
ul-08an-09ul-09an-10ul-10an-11ul-11an-12ul-12an-13ndex Points(RM)
KossanFBMKLCI
 
PP 12247/06/2013 (032380) 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.
 
Kossan Rubber Industries
15 July 2013
AmResearch Sdn Bhd 2
CHART 1 :
 
QUARTERLY EARNINGS PERFORMANCE
10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 1󰁑10 2󰁑10 3󰁑10 4󰁑10 1󰁑11 2󰁑11 3󰁑11 4󰁑11 1󰁑12 2󰁑12 3󰁑12 4󰁑12 1󰁑13󰁔󰁵󰁲󰁮󰁯󰁶󰁥󰁲 (󰁒󰁍 󰁭󰁩󰁬) 󰁐󰁲󰁥󰁴󰁡󰁸 󰁐󰁲󰁯󰁦󰁩󰁴 (󰁒󰁍 󰁭󰁩󰁬) 󰁅󰁂󰁉󰁔󰁄󰁁 󰁍󰁡󰁲󰁧󰁩󰁮 (%)
 
Source: Company, Bursa Malaysia, AmResearch
CHART 2 :
 
KOSSAN’S INSTALLED CAPACITY (MIL PCS) – HISTORICAL AND PROJECTED
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2007 2008 2009 2010 2011 2012 2013󰁆 2014󰁆 2015󰁆 2016󰁆 2017󰁆
 
Source: Company, AmResearch
 
Kossan Rubber Industries
15 July 2013
AmResearch Sdn Bhd 3
CHART 3 :
 
LATEX AND NITRILE PRICE TREND
1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 5.00 5.50 6.00 6.50 7.00 7.50 8.00 󰁊󰁡󰁮󰀭12 󰁁󰁰󰁲󰀭12 󰁊󰁵󰁬󰀭12 󰁏󰁣󰁴󰀭12 󰁊󰁡󰁮󰀭13 󰁁󰁰󰁲󰀭13
󰁎󰁒 󰁐󰁲󰁩󰁣󰁥󰁳 (󰁒󰁍/󰁫󰁧) 󰀭 󰁌󰁈󰁓 󰁎󰁂󰁒 󰁐󰁲󰁩󰁣󰁥󰁳 (󰁕󰁓󰁄/󰁴󰁯󰁮󰁮󰁥) 󰀭 󰁒󰁈󰁓
Holding relatively steady of late
 
Source: Company, AmResearch, MRB
TABLE 1: PREVIOUS CORPORATE EXERCISES
󰁆󰁩󰁮󰁡󰁮󰁣󰁩󰁡󰁬 󰁙󰁥󰁡󰁲 󰁒󰁥󰁷󰁡󰁲󰁤 󰁐󰁡󰁩󰁤󰀭󰁵󰁰 (󰁍󰁩󰁬󰁬󰁩󰁯󰁮 󰁳󰁨󰁡󰁲󰁥󰁳)
󰀱󰀹󰀹󰀶 󰁉󰁐󰁏 󰀱󰀹󰀮󰀹󰀱󰀹󰀹󰀹 󰁂󰁯󰁮󰁵󰁳 󰁩󰁳󰁳󰁵󰁥 󰀸 󰁦󰁯󰁲 󰁥󰁶󰁥󰁲󰁹 󰀵 󰀵󰀱󰀮󰀷󰀲󰀰󰀰󰀳 󰁂󰁯󰁮󰁵󰁳 󰁩󰁳󰁳󰁵󰁥 󰀱 󰁦󰁯󰁲 󰁥󰁶󰁥󰁲󰁹 󰀵 󰀶󰀲󰀮󰀰󰀲󰀰󰀰󰀵 󰁂󰁯󰁮󰁵󰁳 󰁩󰁳󰁳󰁵󰁥 󰀱 󰁦󰁯󰁲 󰀵 󰀷󰀴󰀮󰀴󰀲󰀰󰀰󰀵 󰁅󰁓󰁏󰁓 󰀷󰀹󰀮󰀹󰀲󰀰󰀱󰀰 󰁂󰁯󰁮󰁵󰁳 󰁩󰁳󰁳󰁵󰁥 󰀱 󰁦󰁯󰁲 󰀱 󰀱󰀵󰀹󰀮󰀹
 
Source: Company, AmResearch
CHART 4 :
 
DIVIDEND PAYOUT RATIO (%)
40 33 43 23 25 37 38 38 40 0 5 10 15 20 25 30 35 40 45 50
Source: Company, AmResearch

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