- We maintain our BUY on Kossan Rubber Industries but with a higher fair value of RM7.60/share (ex-bonus:

RM3.80/share), based on a higher target PE of 15x (vs.12.5x previously).

- Note that the stock will be traded ex-bonus (1-for-1) today. The exercise would double the group’s outstanding number of shares of 50 sen each from 319.7mil to 639.5mil. The entitlement date has been set for 8 Nov.

- We believe a higher PE multiple for Kossan is justified given:- (1) its greater earnings growth (CY14: 20% vs.

Hartalega’s and Top Glove’s 10%-12%) backed by a strong glove capacity expansion; (2) margin expansion from a larger nitrile segment contribution (FY13F: +7ppts to 50%) as well as full automation of its plants within the next 2 years; and (3) bright prospects for its technical rubber products (TRP) division.

- The group is presently undergoing a transformation phase with its focus on technology innovation. Improving plant efficiencies and line productivities on a new manufacturing model will help spearhead its next phase of growth and ensure the group remains competitive.

- We understand that Kossan will be constructing 3 nitrile glove plants by May 2014 which will collectively expand its installed capacity by ~5bil pcs (or 30%). This potentially translates into additional revenue of ~RM400mil. We gather that the group has sold forward the bulk of its new capacities.

- Its TRP business (10% of revenue) also looks promising with the construction of its Jakarta plant coinciding with the turnaround of the US automotive industry. The group intends to expand its reach there and also tap into the growing Indonesian automotive and infrastructure sectors.

- We are also encouraged by management’s recent move to raise its dividend payout ratio to 40%-50% within 2-3 years from 25%. Coupled with the stock’s improved liquidity exbonus, we anticipate investor interest to remain piqued.

- Although yields have declined following its impressive share price performance (YTD: +94% vs FBM KLCI’s +7%), its FY13F-FY15F average of 3% is still decent. We believe the stock still has legs on the upside given the group’s upward earnings trajectory.

- Current valuations are still attractive. Kossan is presently trading at an FY14F PE of 13x, a steep 44% discount to Hartalega’s 23x and 19% to Top Glove’s 16x.

Source: AmeSecurities