Highlights

To undertake a bonus issue of up to 319.7m new ordinary shares of RM0.50 each in the Company, to be credited as fully paid-up at par, on the basis of one Bonus Share for every one existing Share.

Entitlement date will be determined and announced at a later date upon the receipt of all relevant approvals. This exercise is not intended to be implemented in stages over a period of time.

In order to provide for the shortfall in reserves at the Company level, Kossan’s subsidiaries will distribute an interim tax exempt dividend totalling RM160.0m to the Company for the purpose of facilitating this exercise.

Rationale of this corporate exercise:

1. Increase the capital base of the Company to a level that will better reflect the Group’s current scale of operations.

2. Reward existing shareholders for their continuous support by granting greater participation while maintaining their equity interest.

3. Enhance greater participation from a broader range of investors in view of the larger capital base.

Approvals required from:

1. Bursa Malaysia for the listing and quotation of the Bonus Shares on the Main Market.

2. Shareholders at an EGM to be convened.

3. Any other relevant authorities / parties, if required.

Applications are expected to be made to the relevant parties within one month from the date of this announcement and target to compete the whole exercise by 4QCY13.

Comments

We are positive on this as it will enhance the liquidity and marketability of the shares although theoretically, there are no fundamental changes.

Risks

• Spike in latex prices.
• Weaker USD against the MYR.
• Delays in capacity expansion plans, causing a hold back in capturing oncoming glove demand.

Forecasts

Maintained.

Rating

BUY, TP: RM7.30

Positives – Balanced 50:50 product mix of nitrile and NR gloves will allow it to cater to both markets and mitigate risks from sudden price hikes in either nitrile or NR latex.

Negatives – We believe Kossan has been a sector laggard due to its lack of specialization (of being predominantly a nitrile, NR, or OBM glove player).

Valuation

We reiterate BUY call on the equity based on unchanged TP of RM7.30 derived based on unchanged 12.8x CY14 EPS.

Kossan’s PE multiple of 12.8x was derived by discounting 4x to the average of Hartalega and Top Glove’s PE multiples. On average, Kossan has been trading at 4x discount to peers for past 5 years.

Source: Hong Leong Investment Bank Research - 3 Sep 2013