RUBBER PRODUCTS

KOSSAN RUBBER
INDUSTRIES
(KRI MK, KRIB.KL) 16 February 2011

Hit by legal suit?

Company report HOLD
AmResearch Sdn Bhd Price: RM3.23
www.amesecurities.com.my Fair Value: RM3.50
+603 2036 2292 Rationale for report : Company Update

YE to Dec FY09 FY10F FY11F FY12F

Quick Take
Core EPS (Sen) 20.9 34.7 36.1 39.6
PE (X) 15.5 9.3 8.9 8.2

Source : AmResearch

• Kossan Rubber Industries Bhd announced that its wholly-owned subsidiary Perusahaan
Getah Asas Sdn Bhd (PGA) had been served a Writ of Summons and a statement of claim by
Ms. Seow Yin Lee (Plaintiff).

• According to the Bursa announcement, the Plaintiff claims the existence of a non-disclosure
agreement entered into with PGA, which had allegedly committed breached sometime in late
2009 and/or early 2010.

• The Plaintiff is seeking an injunction against Kossan for damages in the sum of RM24mil for
her reputation loss, financial loss or damages in projected profits as a consequence of the
breach of the alleged non-disclosure agreement, plus interest at 8% per annum over the said
sum from the date of filing of the writ.

• Kossan believes the case is lacking in merit, frivolous and that the prospects of
successfully defending against the legal proceedings are good.

• We are surprised by this negative development. However, we maintain our earnings

forecasts at this juncture as it may be too premature to arrive at a conclusion, given the lack
of details. Nevertheless, as an indication, a RM24mil damages could potentially shave 16%
off our FY11F net profit forecast of RM115mil.

• The group is due to release its 4QFY10F results next week, of which we expect a net profit
for the full year to come in slightly toppish of our FY10F forecast of RM111mil. 9MFY10 net
profit stood at RM89mil. We understand the final quarter is likely to see a relatively stable
margin on the back of higher ASPs for its more balanced product mix of nitrile and latex-
based examination gloves.

• No change to our HOLD recommendation with fair value of RM3.50/share, based on a fair PE
of 11x FY11F earnings. Our target PE is at a 15% discount to Top Glove’s fair PE multiple of
13x.

Published by The information and opinions in this report were prepared by AmResearch Sdn Bhd. 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
AmResearch Sdn Bhd (335015-P)
solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with
(A member of the AmInvestment Bank Group)
the securities mentioned herein. Members of the AmInvestment 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
15th Floor
we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and
Bangunan AmBank Group
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
55 Jalan Raja Chulan
any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this
50200 Kuala Lumpur
date and are subject to change without notice.
Tel: (03)2036-2633 (general)
(03)2072-1866/99 (dealing)
For AmResearch Sdn Bhd
(03)2070-2444 (research)
Fax: (03)2078-3162

Benny Chew
Managing Director

PP 12247/06/2011(029701)
Kossan Rubber Industries 16 February 2011

TABLE 1 : VALUATION MATRIX

YE to Dec FY08 FY09 FY10F FY11F FY12F

Revenue (RMmil) 897.2 837.0 1,198.1 1,355.0 1,457.5

Core net profit (RMmil) 59.2 66.7 111.0 115.6 126.6
EPS (Sen) 18.5 20.9 34.7 36.1 39.6
EPS growth (%) 7.4 12.7 66.5 4.1 9.6
Consensus EPS (Sen) 36.9 41.5 45.6
DPS (Sen) 7.0 6.0 6.5 6.5 6.5
PE (x) 17.5 15.5 9.3 8.9 8.2
EV/EBITDA (x) 11.3 9.4 6.6 6.0 5.1
Div yield (%) 2.2 1.9 2.0 2.0 2.0
ROE (%) 21.5 20.3 28.3 24.4 22.0
Net Gearing (%) 38.0 32.2 29.2 18.5 5.9

Source : Company, AmResearch estimates

AmResearch Sdn Bhd 2