RUBBER PRODUCTS

KOSSAN RUBBER INDUSTRIES

(KRI MK, KRIB.KL)

27 August 2010

Interim in line to meet FY10F forecast

Company report
AmResearch Sdn Bhd www.amesecurities.com.my +603 2036 2292
Rationale for report : Company Result
YE to Dec FY09 41.7 8.1 FY10F 34.7 9.8 FY11F 41.4 8.2 FY12F 47.0 7.2

HOLD
Price: RM3.46 Fair Value: RM3.82

Quick Take
Published by

Core EPS (Sen) PE (X) Source : AmResearch

Kossan Rubber Industries Bhd (Kossan) reported net profit of RM30mil for 2QFY10. Annualised, 1H earnings make up 54% and 50% of our full year forecast and consensus estimates, respectively. We consider this largely in line to our forecasts. Sales turnover for 2Q was marginally lower by 2% as compared to preceding quarter, owing to a stronger RM against the US dollar. As an indication, RM appreciated about 5% against the US dollar between April-June versus the January-March 2010 period. Similar to other glove companies impacted by the strong headwinds of weak RM and high latex costs, sequential contraction in Kossans EBITDA margin was seen, although the 0.9ppt drop to 17.9% is of a much smaller quantum. By contrast, margin for Top Glove Corp (HOLD, FV: 6.25/share) and Supermax Corp (SUCB MK, Non-rated) fell -4ppts QoQ. While pretax decreased by 6.5% QoQ due to some time lag in cost-price adjustments, net profit was rather flattish (QoQ: -1%), helped by lower tax rate of 17% (-4.5ppts). Management attributed this to its better production mix on higher margin gloves. To be sure, 42% and 38% of total gloves sold in 2Q are powder-free and nitrile glove variants. Maintain HOLD on Kossan with unchanged fair value of RM3.82/share based on target PE of 11x FY10F earnings. The groups focus on better margin glove variants of nitrile and powder-free ones (76%-80%) should cushion it from potential aggressive future price undercutting as compared to other smaller manufacturers - once supply catches up with demand. The group is one of the net beneficiaries of the narrowing in price differential between nitrile and natural rubber gloves (10%-15% vs. 25%-30%) due to the high latex input costs. In addition, managements requisite for pre-secured customer orders as part of its expansion strategy serves to truncate risks of idle capacity utilisation.

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Benny Chew Managing Director

PP12247/06/2011(029701)

Kossan Rubber Industries

27 August 2010

TABLE 1 : RESULTS SUMMARY

Ye to Dec Turnover EBITDA Interest Expense Interest Income Amortisation Depreciation Pre-Exceptional Profit Exceptional Associates Pretax Profit Taxation Minorities Net Profit EPS (sen) Net DPS (sen) BV/Share (RM) EBITDA margin (%) Pretax margin (%) Effective tax rate (%) 1HFY09 399.1 29.0 (4.9) 0.5 0.0 (33.7) 35.0 0.0 0.0 35.0 (7.3) (0.3) 27.5 17.2 0.0 2.23 7.3 8.8 20.8 1HFY10 519.3 49.3 (4.1) 0.9 0.0 (17.0) 75.0 0.0 0.0 75.0 (14.4) (0.2) 60.4 37.8 0.0 2.52 9.5 14.5 19.2 % YoY 30.1 70.4 1Q10 262.8 49.3 (2.2) 0.2 0.0 (8.6) 38.8 0.0 0.0 38.8 (8.3) (0.1) 30.4 19.0 0.0 2.33 18.8 14.8 21.4 2Q10 256.5 46.0 (2.0) 0.7 0.0 (8.4) 36.3 0.0 0.0 36.3 (6.1) (0.1) 30.0 18.8 0.0 2.52 17.9 14.1 16.9 % QoQ (2.4) (6.8)

114.2 119.9 119.9

(6.5) (1.2)

Source : Company, AmResearch estimates

TABLE 2 : VALUATION MATRIX

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 (%) Source : Company, AmResearch estimates FY08 897.2 59.2 37.0 7.4 n/a 7.0 9.2 6.7 2.1 21.5 38.0 FY09 837.0 66.7 41.7 12.7 n/a 6.0 8.1 5.6 1.8 20.3 32.2 FY10F 1,198.1 111.0 34.7 n/a 37.4 6.5 9.8 6.8 1.9 27.6 27.1 FY11F 1,457.7 132.5 41.4 19.3 44.4 7.0 8.2 5.5 2.1 26.4 16.4 FY12F 1,726.4 150.1 47.0 13.3 48.1 7.5 7.2 4.6 2.2 24.1 4.8

AmResearch Sdn Bhd