PP 7767/09/2010(025354)

Malaysia Corporate Highlights

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

R e su l ts N o t e 1 March 2010
MARKET DATELINE

Kossan Rubber Industries Share Price

Fair Value
:
:
RM6.86
RM10.74
FY09 Core Earnings Surged 62% YoY, Beating Recom : Outperform
Estimates (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 41.8 74.9 202.2 9.2 - 3.1 0.45 36.5 1.2
2010f 1,082.9 132.1 82.6 82.6 10.3 8.3 65.0 2.3 0.16 31.6 1.5
2011f 1,378.5 164.7 103.0 103.0 24.7 6.7 77.0 1.7 0.00 29.7 1.8
2012f 1,508.1 173.1 108.3 108.3 5.1 6.3 - 1.4 0.00 24.4 2.1
# Excludes exceptional items
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ FY09 core earnings grew 61.7% yoy. Kossan’s 4QFY12/09 core net RHBRI Vs. Consensus
profit of RM41.0m (+157.9% yoy) came in above our and consensus √ Above √
expectations with full-year core net profit of RM119.8m (+61.7% yoy) In Line
accounting for 116.1% and 166.4% of our and consensus estimates Below
respectively. 4Q EBITDA margin jumped 6.1%-pts qoq due to better
Issued Capital (m shares) 159.9
product mix as more higher value gloves are being sold during the quarter
Market Cap(RMm) 1,096.7
as well as operating leverage effects on the back of increased in utilisation
Daily Trading Vol (m shs) 0.4
rate from the TRP segment and consequently, Kossan’s full-year EBITDA
52wk Price Range (RM) 2.77-6.86
margin of 21.9% came in ahead of our full-year FY09 EBITDA margin
Major Shareholders: (%)
forecast of 16.6%. This, however, was partly offset by a slower-than-
Kossan Holdings 51.1
expected full-year revenue growth. No dividend was declared for the year,
Asian Small Companies 5.2
which was below our expectations of total gross DPS of 8.5 sen (FY08: 3.5
sen gross, 2.5 sen TE).
♦ 4Q revenue grew 8.4% qoq… Qoq, revenue grew by 8.4% qoq mainly FYE Dec FY10 FY11 FY12
on the back of: 1) upward adjustments to selling prices to pass on the EPS chg (%) 5.1 8.0 n.a.
higher raw material cost to customers for the glove segment (average Var to Cons (%) 27.1 33.8 n.a.
latex price jumped 20.4% qoq); and 2) improved demand from the TRP
PE Band Chart
segment.
♦ …but 4Q core net profit jumped 53.8%. 4Q09 pre-tax margin PER = 16
expanded by 4%-pts qoq largely on the back of: 1) stronger performance PER = 14x
PER = 10x
from the TRP segment as a result of operating leverage effects due to PER = 6x
higher utilisation rates; and 2) better product mix as more higher value
gloves were sold during the quarter. Coupled with a lower effective tax
rate of 23.2% in 4Q09 as compared to 26.5% in 3Q09, core net profit
grew (+53.8%) qoq. In 4Q, Kossan recorded a forex loss of RM17m and
the management has guided that this would be the final quarter that
Kossan would be recognising forex losses. Relative Performance To FBM KLCI
♦ 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 Kossan Holdings

expansion.
♦ Forecasts. We have lowered our FY10 and FY11 revenue forecasts by
10.2% and 7.2% respectively. At the same time, we have raised our FY10 FBM KLCI

and FY11 EBITDA margin projections by 2.5%-pts and 2.4%-pts

respectively to reflect the better-than-expected EBITDA margin achieved
by Kossan thus far. As a result, our FY10 and FY11 earnings projections
have been raised by 5.1% and 8.0% respectively. We introduced our FY12
numbers. David Chong, CFA
♦ Investment case. Our indicative fair value has been raised to RM10.74 (603) 92802179
from RM10.22, which is based on unchanged target CY10 PER of 13x. We david.chong@rhb.com.my
reiterate our Outperform call on the stock.

Please read important disclosures at the end of this report.

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 1 March 2010

Table 2. Earnings review

QoQ YoY Yoy
FYE Dec (RMm) 4Q08 3Q09 4Q09 (%) (%) FY08 FY09 (%) Comments
Revenue 238.6 210.1 227.7 8.4 (4.6) 897.2 837.0 (6.7) Qoq growth due to higher revenue
from the glove segment stemming
from the upward adjustments to
selling prices to pass on the higher
raw material prices. Lower full-year
revenue mainly due to lower selling
prices and slowdown in TRP segment
as a result of the global economic
crisis.
Better contribution from both the
EBITDA 29.4 42.6 60.0 40.9 +>100 148.4 183.6 23.7 glove and TRP segment leads to
EBITDA margin expansion.

Dep & amort (7.7) (8.5) (9.3) 9.7 20.4 (34.0) (34.0) -

EBIT 21.7 34.2 50.8 48.6 +>100 98.9 149.5 51.2

Total debt as at end-4Q09 was
Int exp (2.9) (2.1) (2.2) 5.0 (24.8) (10.5) (9.1) (13.1) RM200.0m against RM186.7m as at
end-3Q09 and RM226.9m as at end
4Q08.
3Q09 and 4Q09 EI relates to a forex
Exceptionals - (11.3) (17.0) (33.7) n.m. (15.4) (53.0) (70.9) hedging losses.

Pre-tax profit 18.8 20.8 31.6 51.8 68.3 72.9 87.4 19.9

Tax (2.9) (5.5) (7.3) 32.8 +>100 (13.7) (20.1) 46.5

n.m
Minority interest - 0.1 (0.3) n.m. (0.5) (0.5) (9.9)

Net profit 15.9 15.4 24.0 56.0 50.9 58.6 66.8 13.9

Core net profit 15.9 26.6 41.0 53.8 +>100 74.1 119.8 61.7

Margins (%)

EBITDA 12.3 20.3 26.4 16.5 21.9

EBIT 9.1 16.3 22.3 11.0 17.9

Pre-tax 7.9 9.9 13.9 8.1 10.4

Effective tax rate remained lower
Effective tax rate 15.3 26.5 23.2 18.8 23.0 than statutory rate due to availability
of tax incentives.

Net profit 6.7 7.3 10.5 6.5 8.0

Core net profit 6.7 12.7 18.0 8.3 14.3

Segmental revenue

Gloves 210.7 188.6 199.1 5.5 (5.5) 781.8 746.3 (4.5)

Lower yoy as global demand for TRP
TRP 28.0 21.5 28.7 33.6 2.4 115.3 90.7 (21.4) products affected by the slowdown in
the economy.
Total 238.6 210.1 227.7 8.4 (4.6) 897.2 837.0 (6.7)

Segmental pre-tax profit

Stronger yoy reflecting margin
Gloves 18.6 19.2 36.4 90.2 95.7 64.7 81.0 25.2 expansion as a result of: 1) price
adjustments made, which more than
covered the rising raw material cost;
and 2) better product mix.
QoQ improvement largely due to
0.1 1.6 4.9 +>100 +>100 8.2 6.4 (21.7) operating leverage effect as a result
TRP
of higher utilisation rate during the
quarter.
18.8 20.8 41.3 98.6 +>100 72.9 87.4 19.9
Total

Segmental pre-tax margin (%)

8.8 10.2 18.3 8.3 10.8
Gloves
TRP 0.5 7.6 16.9 7.1 7.1
Source: Company, 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 1,082.9 1,378.5 1,508.1 Avg capacity (bn pcs) 11.8 14.1 14.1
Turnover growth (%) 19.1 29.4 27.3 9.4 Utilisation rate (%) 93.0 90.0 95.0
Avg selling price (RM) 78.9 80.7 82.5
EBITDA 183.6 207.7 254.5 267.0
EBITDA margin (%) 21.9 19.2 18.5 17.7

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

EBIT 149.5 178.1 221.2 232.6

EBIT margin (%) 17.9 16.4 16.0 15.4
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 87.4 171.3 213.6 224.5

Tax (20.1) (39.2) (48.9) (51.4)
Minorities (0.5) 0.0 0.0 0.0
Net Profit 66.8 132.1 164.7 173.1
Core Net Profit 119.8 132.1 164.7 173.1
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
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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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