BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2012(029624)

Monday, 27 February, 2012

Results Review

Kossan Rubber Industries

Inline
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 KRI MK 1,048.7 Equity 319.7 3.67 2.48 393,459 35.7% Y

Buy
Price: Target Price: RM3.28 (32.6% upside)RM4.35
Kossans FY11 earnings of RM91.4m is inline with our expectation. Full year net earnings dipped 22.7% due to the all time high latex price during first half and stronger MYR against the USD. FY11 EBIT margin has dropped from 14.9% to 11.3% due to the abovementioned reasons. Nevertheless, QoQ profit has shown slight improvement as latex price has since stabilised with 4Q net earnings of RM23.8m is the highest for FY11. As such, we expect earnings to further improve in the next quarter. We are maintaining our FY12 and FY13 earnings forecast and target price remains unchanged RM4.35. Maintain BUY. Higher contribution from TRP. Technical rubber product division grew steadily in FY11 with 19.5% and 103% growth in turnover and PBT respectively; mainly attributed by higher valued infrastructure products secured by projects. Stabilised latex price. Most recently, intervention from the Thai government to support rubber price has propped up natural latex prices to stay above RM7.00/kg in the short term. Earlier, most rubber glove buyers around the world have been keeping their inventory low (2 months compared to their usual inventory level of about 4 months). This level has been maintained despite latex price had dropped below RM7/kg as they anticipate further decline in latex price. Now that a floor price has been determined; such expectations may no longer hold hence we expect buyers to increase their inventory level back to their normal level as current latex price is around its floor level. With this, the demand of rubber gloves shall return to normal. Bird flu threat. Recently, the number of bird flu cases has escalated. In January, Mexico recorded 1,623 cases, including 1,456 H1N1 cases while in New Jersey, there have been more than 300 confirmed cases; and in Vietnam, the Ho Chi Minh City Pasteur Institute confirmed that a new kind of porcine flu virus, A/H3N1, has appeared, apparently a combination of the swine-related A/H1N1 and A/H3N2 flu viruses. Over in Europe, Norway is facing an outbreak of influenza A, which is caused by a new strain of virus known as H3N2. France has issued a warning about the H3N2 swine flu. The bird flu threat will have positive impact on our glove producers as this has been proven in 2009-2010 where most of our glove players made record high earnings. No change to our forecast. We are maintaining our FY12 and FY13 earnings forecasts at RM126.3m and RM136m respectively. However, we will remain vigilant on the latex price trend in the immediate future. Meanwhile, Kossans financial leverage is manageable with net gearing of 0.2x supported by strong interest coverage of 22x. View & Valuation. Our target price is unchanged at RM4.35 based on 11x PER over FY12 EPS of 39.5sen. With over 32% potential upside, we maintain our BUY recommendation on Kossan.

Expecting a Better 2012

Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Kossan Holdings SB KWAP EPF
4.7 0.9% 1.8% 0.9 51.8% 7.6% 5.0%

Financial Derivatives Share Performance (%) Absolute vs. KLCI Financial Highlights FYE 31 Dec Turnover (RMm) 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 (%) Share Price Chart

n.a. 1mth (5.5) 1.4 3mth 8.6 (1.2) 12mth 9.9 1.4

2009 842.1 95.0 85.8 66.7 20.9 15.7 9.0 2.7% 1.12 11.3% 10.2% 21.5% 20.3% 9.9% 0.5

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

2012E 1,476.0 169.2 161.5 126.3 39.5 8.3 11.0 3.4% 1.83 11.5% 10.9% 20.0% 23.2% 14.2% 0.3

2013E 1,612.0 182.3 174.4 136.5 42.7 7.7 11.0 3.4% 2.15 11.3% 10.8% 20.0% 21.3% 13.4% 0.2

-6.1% 13.8% 17.7% 13.7% 14.2%

24.4% 64.2% 72.5% 77.2% 77.0%

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

35.1% 36.9% 39.1% 38.2% 38.1%

9.2% 7.7% 8.0% 8.1% 8.1%

4.00 3.80 3.60 3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

The Research Team research@bimbsec.com.my 03-26918887 ext 111

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27 February 2012

Results Review: Kossan Rubber Industries 4QFY11

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 (%) 4QFY10 253.0 36.8 34.9 (5.5) (0.2) 29.2 9.1 0.2 14.5% 13.8% 11.6% -15.6% 1QFY11 256.4 30.0 27.9 (4.5) (0.4) 23.0 7.2 0.1 11.7% 10.9% 9.0% -16.2% 2QFY11 275.6 28.5 26.6 (5.4) (0.4) 20.9 6.5 0.1 10.3% 9.7% 7.6% -20.1% 3QFY11 278.5 32.9 31.1 (7.1) (0.4) 23.6 7.4 0.2 11.8% 11.2% 8.5% -22.9% 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% QoQ Chg 1.1% -2.3% -2.2% -13.4% 21.8% 0.9% 0.9% 5.9% -3.3% -3.2% -0.2% -11.5% YoYChg 9.8% 7.4% 9.1% 36.3% 4.2% 3.9% 3.9% 164.1% -2.2% -0.6% -5.4% 24.9% FY10 1,047.9 156.0 148.1 (29.5) (0.4) 118.2 37.0 0.2 14.9% 14.1% 11.3% -19.9% 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% YTD Chg 4.2% -20.8% -21.6% -21.4% 295.5% -22.7% -22.7% 39.5% -24.0% -24.7% -25.8% 0.2%

Source: BIMB Securities

Income Statement
FYE 31 Dec (RMm) Turnover EBIT Pretax profit Net profit EPS (sen) EPS growth (%) DPS (sen) NTA/ share (RM) Net gearing (x) PER (x) Div. yield (%) P/ NTA (x) EV/ EBITDA (x) ROE (%) ROA (%) 2009 842.1 95.0 85.8 66.7 20.9 14.2% 9.0 1.1 0.5 17.1 2.5% 3.2 10.3 20.3% 9.9% 2010 1,047.9 156.0 148.1 118.2 37.0 77.0% 9.0 1.4 0.2 9.6 2.5% 2.6 6.4 29.4% 16.1% 2011 1,092.1 123.6 116.1 91.4 28.6 -22.7% 9.0 1.5 0.2 12.5 2.5% 2.3 7.7 19.3% 11.5% 2012E 2013E 1,476.0 1,612.0 169.2 182.3 161.5 174.4 126.3 136.5 39.5 42.7 38.1% 8.1% 11.0 11.0 1.8 2.1 0.3 0.2 9.0 8.4 3.1% 3.1% 2.0 1.7 6.2 5.6 23.2% 21.3% 14.2% 13.4% Source: BIMB Securities

Balance Sheet
FYE 31 Dec (RMm) Non Current Assets Current Assets Total Assets Current Liabilities Non Current Liabilities Shareholders' Fund Minority Interests Equity & Liabilities 2009 360.7 327.9 688.5 260.9 68.6 357.4 1.6 688.5 2010 410.6 372.6 783.2 271.8 61.9 447.4 2.0 783.2 2011 439.1 373.3 812.4 245.0 58.8 498.9 9.7 812.4 2012E 463.0 500.1 963.1 309.8 58.8 590.0 4.4 963.1 2013E 482.2 599.4 1,081.6 326.0 58.8 691.4 5.4 1,081.6 Source: BIMB Securities

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27 February 2012

Results Review: Kossan Rubber Industries 4QFY11

DEFINITION OF RATINGS BIMB Securities uses the following rating system: 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 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 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

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27 February 2012

Results Review: Kossan Rubber Industries 4QFY11

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