- According to an announcement on Bursa Malaysia, Kossan Rubber Industries (Kossan) has declared a final tax-exempt dividend of 7 sen/share in respect of the financial year ended 31 December 2012. The entitlement date has been fixed for 2 July with payment on 16 July.

- Together with the 5 sen tax-exempt interim dividend it announced back in 3Q12, Kossan is paying out a total 12 sen gross DPS for FY12. This results in a 12ppts YoY improvement in its gross dividend payout ratio to 37%. In the past, dividend payouts have ranged from 20% to 43%.

- While the proposed final dividend came in higher than our forecast of 4 sen, we are not too surprised since management had indicated its intention of doubling its payout ratio to 40%-50% within the next 2-3 years.

- In light of this, we have raised our gross DPS forecasts for FY13F-FY14F by 3%-12% to 13.5 sen and 15 sen, respectively, as we tweak upwards our payout ratio assumptions to be in- line with FY12’s. At the current price, this translates into yields of 3.6% to 4% – the highest among its peers. We reckon that Kossan’s dividend yields are attractive for a defensive growth sector stock and would help draw interest from income investors.

- In an additional bid to elevate the stock’s liquidity, management has also hinted at the possibility of undertaking some form of corporate exercise (bonus issues, free warrants, etc.) The last time it did a bonus issue was in 2010 (1-for-1).

- We believe this payout ratio is sustainable moving forward as Kossan has a healthy balance sheet (net gearing of only 0.2x) and the ability to generate operating cash flows above the RM100mil mark each for FY13F-FY15F.

- No change to our BUY recommendation and estimates for Kossan. Our fair value of RM4.60/share is pegged to a fair PE of 12.5x its FY13F EPS (sector average is 14x). The robust global glove demand (FY13F: +10% to +15%), low input cost environment and the possibility of a worldwide pandemic stemming from the H7N9 avian flu augurs well for Kossan’s earnings.

Source: AmeSecurities