-  According to Bursa Malaysia, Kossan Rubber Industries (Kossan) has proposed to undertake a bonus issue on the basis of one bonus share for every existing ordinary share (1-for-1), at an entitlement date to be determined later.

-  The bonus issue will be implemented by capitalising up to RM159.9mil from the group’s retained earnings. Upon completion, this exercise will double the group’s outstanding number of shares from 319.7mil to 639.5mil and raise its share capital to RM319.7mil.

-  The group last undertook a bonus issue in April 2010, whereby a similar 1-for-1 issue was proposed.

-  While a bonus issue does not have an impact on Kossan’s valuations/fundamentals (i.e. not value accretive to shareholders), it should improve the stock’s trading liquidity and further enhance its appeal. As such, we expect some bounce to the group’s share price in the short term on positive investor sentiment.

-  The group’s steady glove capacity expansion (FY13F: +30%) against the backdrop of robust global glove demand, current low input cost environment and strengthening of the USD against the RM augur well for its earnings.

-  In addition, its average yield of 3.1% (in tandem with its recently doubled target payout ratio of 40%-50% in the near term) is decent for a defensive growth sector stock and would help draw interest from income investors.

-  Following these positives and its relatively cheaper valuations, Kossan’s share price has been a leading YTD performer in our glove universe, surging 93.5% (FBM KLCI: +2.3% YTD). Prior to the run-up, Kossan was trading at a 30%-50% discount to industry leaders Top Glove and Hartalega. At present, the discount has been trimmed to 16%-28%.

-  No change to our forecasts for now. We maintain our BUY recommendation on Kossan but have placed our indicative fair value of RM6.30/share under review pending a meeting with management.

Source: AmeSecurities