BIMB SECURITIES RESEARCH

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MARKET INSIGHT
PP16795/03/2013(031743)

Tuesday, 26 February, 2013

Results Review

4QFY12 Inline

Kossan Rubber
A Record Year
KRI MK 1,045.1 318.6 3.50 2.97 176,746 36.2% Y n.a. Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Kossan Holdings S.B. KWAP EPF 4.5 -2.4% -3.6% 0.8 51.2% 7.6% 5.0%

Buy
Price: Target Price: RM3.28 (+27.4% upside) RM4.18
Kossans FY12 net earnings came in within our expectations as well as consensus. Full year revenue and net earnings improved by 13.1% and 14.3% respectively mainly due to contribution from new production lines in the glove division and lower latex cost; as well as strong contribution from technical rubber products. Overall margins have also improved due to the same reason. We are revising our FY13 upwards and introducing our FY14 numbers. We maintain our BUY recommendation on Kossan with a revised target price of RM4.18. Stabilised latex price. Latex price has stabilised to slightly above RM6.00/kg in the past 3 months without much fluctuations. Improved margins. With lower latex cost, 4Q EBIT margin has improved to 13.4% vs. QoQs 12.9% and YoYs 11.4%. As a result, full year EBIT margin has improved from 11.3% to 11.9%. Looking forward. The new surgical gloves plant with an installed capacity of 350m pieces per annum, which has commenced operations, is expected to contribute positively to both turnover and net earnings for FY13. Increasing our earnings forecasts. We are revising our FY13 earnings forecast upwards by 17% to RM121.5m by factoring in lower production cost and change in product mix which resulted in higher selling price (due to higher surgical gloves prices); and introducing FY14 earnings at RM132.9m. Financial leverage is manageable with net gearing of 0.2x supported by strong interest coverage of 30x. Attractive valuation. Following our earnings revision, we are revising our target price upwards to RM4.18 based on its 5year average PER band of 11x over FY13 EPS of 38sen. At current price, the stock is currently trading at one year forward PER of 8.6x (FY13), way below its usual 11x-12x; and presently offers potential upside of 27.4%; hence maintain our BUY recommendation.
Share Price Chart

Stock Data Bloomberg Ticker Market Cap Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily volume Free Float Shariah Compliant Financial Derivatives Share Performance (%) Absolute vs. KLCI Consensus Net Profit EPS (sen) Historical Price Ratio (x) Price Earnings Price to Book Financial Highlights FYE 31 Dec (RMm) Turnover EBIT Pretax profit Net Profit EPS (sen) PER (x) DPS (sen) Div. Yield (%) NTA/share (RM) EBIT margin Pretax margin Effective tax rate ROE ROA Net Gearing (x) Growth ratios Turnover EBIT Pretax profit Core Net profit EPS growth (%)

1mth (3.0) (4.2)

3mth 3.4 0.6 2012 103.7 32.9

12mth 2.8 (4.2) 2013 117.7 37.3 FY 2012 11.1 2.1

FY 2010 12.2 2.5

FY 2011 10.0 2.1

2010 1,047.9 156.0 148.1 118.2 37.0 8.9 9.0 2.7% 1.40 14.9% 14.1% 19.9% 29.4% 16.1% 0.2

2011 1,092.1 123.6 116.1 91.4 28.6 11.5 9.0 2.7% 1.54 11.3% 10.6% 19.9% 19.3% 11.5% 0.2

2012 1,235.5 147.2 140.9 104.5 32.7 10.0 11.0 3.4% 1.91 11.9% 11.4% 23.9% 18.7% 11.5% 0.2

2013E 1,530.1 164.9 158.4 121.5 38.0 8.6 11.0 3.4% 2.18 10.8% 10.3% 21.5% 18.5% 11.4% 0.3

2014E 1,710.9 179.7 172.9 132.9 41.6 7.9 11.0 3.4% 2.49 10.5% 10.1% 21.5% 17.7% 11.2% 0.2

24.4% 64.2% 72.5% 77.2% 77.0%

4.2% -20.8% -21.6% -22.7% -22.7%

13.1% 19.1% 21.3% 14.3% 14.3%

23.8% 12.0% 12.4% 16.4% 16.2%

11.8% 9.0% 9.2% 9.3% 9.5%

4.00 3.50 3.00 2.50

Nov-12

Mar-12

May-12

Aug-12

Dec-12

Apr-12

Jun-12

Oct-12

Feb-12

Sep-12

Jan-13

Jul-12

Thong Pak Leng pakleng.thong@bimbsec.com.my 03-26918887 ext 186

2.00

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26 February 2013 Quarterly figures

FYE 31 Dec (RMm) Revenue EBIT Pretax profit Taxation Minority Interest Net Profit EPS (sen) Net gearing (x) EBIT margin (%) PBT margin (%) Net profit margin (%) Effective tax rate (%) 4QFY11 281.5 32.2 30.5 (6.2) (0.4) 23.8 7.5 0.2 11.4% 10.8% 8.5% -20.2% 1QFY12 289.4 30.3 28.6 (6.2) (0.5) 22.0 6.9 0.2 10.5% 9.9% 7.6% -21.6% 2QFY12 304.8 32.6 31.1 (7.0) (0.4) 23.6 7.4 0.2 10.7% 10.2% 7.8% -22.6% 3QFY12 322.7 41.5 40.0 (10.0) (0.8) 29.2 9.1 0.2 12.9% 12.4% 9.1% -25.0% 4QFY12 318.6 42.8 41.1 (10.5) (0.9) 29.7 9.3 0.2 13.4% 12.9% 9.3% -25.6%

Results Review: Kossan Rubber Industries 4QFY12

QoQ -1.3% 3.0% 2.8% 5.3% 17.3% 1.5% 1.5% -5.8% 4.4% 4.1% 2.8% 2.4%

YoYChg 13.2% 33.0% 35.0% 70.5% 114.7% 24.4% 24.4% -24.7% 17.5% 19.3% 9.9% 26.2%

FY11 1,092.1 123.6 116.1 (23.2) (1.6) 91.4 28.6 0.2 11.3% 10.6% 8.4% -19.9%

FY12 YTD Chg 1,235.5 13.1% 147.2 19.1% 140.9 21.3% (33.7) 45.6% (2.7) 69.8% 104.5 14.3% 32.7 14.3% 0.2 -24.7% 11.9% 5.3% 11.4% 7.2% 8.5% 1.0% -23.9% 20.0% Source: BIMB Securities

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26 February 2013
DEFINITION OF RATINGS BIMB Securities uses the following rating system:

Results Review: Kossan Rubber Industries 4QFY12

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB Securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this date and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

www.bimbsec.com.my

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