PB Stock-Kossan en 20130718

7/27/2019 PB Stock-Kossan en 20130718

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1 Important disclaimer is provided at the end of this report.| PUBLIC INVESTMENT BANK Page 1 of5

PublicInvest Research Comp a n y U p d a t e Thursday, July 18, 2013KDN PP17686/03/2013(032117)

KOSSAN RUBBER INDUSTRIES BERHAD Ou t p e r f o rm

DESCRIPTION

Unique from its industry peers, Kossan is Malaysias

largest technical rubber products manufacturer, coupled

with latex and nitrile rubber gloves.

12-Month Target Price RM6.61Current Price RM5.83Expected Return 13%

Market MainSector Rubber GlovesBursa Code 7153Bloomberg Ticker KRI MK

SHARE PRICE CHART

52 Week Range (RM) 2.975.843-Month Average Vol (000) 900.4

SHARE PRICE PERFORMANCE

1M 3M 6M

Absolute ReturnsRelative Returns

36.525.7

55.647.1

71.959.8

KEY STOCK DATA

Market Capitalisation (RM m)No. of Shares (m)

1,857.6318.6

MAJOR SHAREHOLDERS

%

Kossan Holdings SB 51.2Kumpulan Wang Persaraan 5.6Invesco 5.1Employees Provident Fund 5.0

Research TeamT 603 2031 3011F 603 2272 3704E [email protected]

Staying Ahead Of The GameWe visited Kossan Rubber Industries Berhad (Kossan)s latest rubber glovesfactory in Klang which is partially powered by biomass energy. The group shouldnot only be lauded for its growing efficiency and technological advances, but fotheir chemical expertise in nitrile copolymer mixing, to form high quality and cosefficient rubber products. We concede that Kossan is deserving of an Outperformrecommendation, supported by its share price having risen 40% since our initiationin May. Surpassing our TP of RM4.85 and in view of the groups commendableprogress and capacity expansion plans, we are revising our TP upwards toRM6.61 (13% upside) premised on our rolled-over dividend discount model foFY14F. At RM6.61, Kossan would only be trading at 12x PE based on FY14FsEPS of 55 sen.

Improving margins. i.) Through research and development of chemicals

advancement, and ii.) machinery efficiency. Kossan is constantlyadvancing its rubber gloves formulation, including ways to eliminate risksof chemical allergies (nitrile) and reduce the weight of gloves to abou3.2g-3.5g (latex). The light-weight gloves would reduce cost per unit andhence improve margins. Kossan will maintain its old lines for small orderswith high specifications to cater especially for existing clients, which wiyield higher margins than high speed orders (c.10%-14%). We canassume 30%-40% of the groups production will be for small orders goingforward with the balance of >60% to be operating for high speed orders.

Growing efficiency. Identifying areas to improve margins by i.) reducingdowntime from interchanging lines, but instead have dedicated lines fohigh specification orders, and ii.) produce more product variants, currentlyoffering 3 main purpose gloves sterilize, clean-room and surgical.

On track for new factories. On our visit, we saw the structure o

2 upcoming factories. 3 additional factories is expected to be completedby December FY13, March and May FY14 respectively. Designed witdouble former lines for higher production and supported by faster linespeed and automation of machines, the number of workers per line isalso estimated to reduce by about 75%.

Reiterate Outperform. Kossan would maintain its performanceunderpinned by i.) increase in capacity expansion to c.26bn gloves by2017 expanding on its nitrile offering, ii.) coupled with softer raw materiaprices, and iii.) improved production efficiency through R & D.

KEY FORECAST TABLE (RM m)

FYE Dec (RM m) 2011A 2012A 2013F 2014F 2015F CAGR

Revenue 1,090.0 1,234.0 1,401.2 1,757.5 1,956.5 12.4%

Gross Profit 366.1 454.1 515.6 646.7 719.9 14.5%

Pre-tax Profit 112.9 138.5 170.3 233.6 262.5 18.4%Net Profit 89.7 102.2 126.6 174.8 197.0 17.0%

EPS (Sen) 28.1 32.2 39.9 55.1 62.0 17.1%

P/E (x) 20.7 18.1 14.6 10.6 9.4

DPS (Sen) 11.0 9.0 15.4 24.7 30.9

Dividend Yield 1.9% 1.5% 2.6% 4.2% 5.3%

Source: Company, PublicInvestResearch estimates

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

PUBLIC INVESTMENT BANK


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PUBLIC INVESTMENT BANK BERHADFigure 1: Progress of Kossans Upcoming Factories Commissioning in March and May 2014

Source: Company

Figure 2: Expansion Plans

Source: Company, PublicInvest Research

9.3 9.3 10.3

11.0

13.0

16.0

21.0

24.0

-

5.0

10.0

15.0

20.0

25.0

30.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

2000.0

FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F

bn pcsRM mCapacity Revenue PBT


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PUBLIC INVESTMENT BANK BERHADFigure 3: Dividend Discount Model

Beta 0.8

Expected market return 9.9%

Risk-free rate 3.5%

Cost of equity 8.6%

Cost of debt 2.5%

Weightage of equity 80.0%

Weightage of debt 20.0%

WACC 7.4%

Terminal Growth Rate 2.0%

Year 2014F 2015F 2016F 2017F 2018F

Dividend Forecast 24.7 30.9 33.1 35.2 40.0

DDM

Y1 0.23

Y2 0.27

Y3 0.27

Y4 0.26

Y5 0.28

Terminal value 5.30

NPV 6.61

Source: PublicInvest Research estimates


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PUBLIC INVESTMENT BANK BERHADKEY FINANCIAL DATA

INCOME STATEMENT DATA

FYE Dec (RM m) 2011A 2012A 2013F 2014F 2015F

Revenue 1,090.0 1,234.0 1,401.2 1,757.5 1,956.5

Cost of sales -723.9 -779.9 -885.6 -1,110.8 -1,236.6

Operating Profit 150.2 185.5 214.3 286.4 318.8

Other Gains / (Losses) -29.9 -40.7 -44.8 -47.8

Finance Costs -7.5 -6.4 0.8 -5.0 -4.9

Pre-tax Profit 112.9 138.5 170.3 233.6 262.5

Income Tax -21.8 -33.7 -41.4 -56.8 -63.9

Effective Tax Rate (%) 19.3 24.3 24.3 24.3 24.3

Minorities -1.4 -2.6 -2.3 -2.0 -1.7

Net Profit 89.7 102.2 126.6 174.8 197.0

Growth

Revenue 4% 13% 14% 25% 11%

Operating Profit -16% 23% 16% 34% 11%

Net Profit -21% 14% 24% 38% 13%

Source: Company, PublicInvest Research estimates

BALANCE SHEET DATA

FYE Dec (RM m) 2011A 2012A 2013F 2014F 2015F

Property, Plant & Equipment 473.2 514.4 499.6 480.5 457.0

Cash and Cash Equivalents 51.6 99.8 134.7 146.0 194.6

Receivables, deposits andprepayment

157.6 217.0 246.4 309.1 344.0

Other Assets 170.2 158.7 174.2 217.3 241.3

Total Assets 852.7 989.9 1,055.0 1,152.8 1,237.0

Payables 102.7 114.6 130.2 163.3 181.8

Borrowings 160.0 199.0 167.6 171.5 175.5Deferred tax 40.2 49.8 49.8 49.8 49.8

Other Liabilities 18.7 21.9 36.7 34.4 38.1

Total Liabilities 321.6 385.3 384.2 419.1 445.2

Shareholders Equity 531.2 604.6 670.7 733.7 791.9

Total Equity and Liabilities 852.7 989.9 1,055.0 1,152.8 1,237.0


PER SHARE DATA AND RATIOS

FYE Dec 2011A 2012A 2013F 2014F 2015F

Book Value Per Share 3.3 3.8 2.1 2.3 2.5

NTA Per Share 3.3 3.8 4.2 4.6 5.0EPS (Sen) 28.1 32.2 39.9 55.1 62.0

DPS (Sen) 11.0 9.0 15.4 24.7 30.9

Payout Ratio (%) 39.1 28.0 38.9 45.0 50.0

ROA (%) 11.0 11.1 12.4 15.8 16.5

ROE (%) 18.4 18.0 19.9 24.9 25.8



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PUBLIC INVESTMENT BANK BERHADRATING CLASSIFICATION

STOCKS

OUTPERFORM The stock return is expected to exceed a relevant benchmarks total of 10% or higherover the next 12months.

NEUTRAL The stock return is expected to be within +/- 10% of a relevant benchmarks return over the next 12 months.

UNDERPERFORM The stock return is expected to be below a relevant benchmarks return by -10% over the next 12 months.

TRADING BUY The stock return is expected to exceed a relevant benchmarks return by 5% or higher over the next 3 months but the

underlying fundamentals are not strong enough to warrant an Outperform call.

TRADING SELL The stock return is expected to be below a relevant benchmarks return by -5% or more over the next 3 months.

NOT RATED The stock is not within regular research coverage.

SECTOR

OVERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months.

NEUTRAL The sector is expected to perform in line with a relevant benchmark over the next 12 months.

UNDERWEIGHT The sector is expected to underperform a relevant benchmark over the next 12 months.

DISCLAIMER

This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable lawThe information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed hereinare subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad(PIVB). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liabilityadequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shagive rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employeesassociates or agents.

This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell anysecurities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financiasituation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits ofthe information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongstothers, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(iescovered in this document.

PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in thesecurities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in,any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies)covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sellthem or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek toperform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from anyentity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation obusinesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickingsand performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoingamongst others, may give rise to real or potential conflicts of interest.

Published and printed by:

PUBLIC INVESTMENT BANKBERHAD (20027-W)9

thFloor, Bangunan Public Bank

6, Jalan Sultan Sulaiman50000 Kuala LumpurT 603 2031 3011F 603 2272 3704Dealing Line 603 2260 6718

PB Stock-Kossan en 20130718

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