AirAsia - Delaying aircraft reduces gearing to just 1.9x

AirAsia has provided the perfect catalyst for an upgrade. With the delay in delivery and additional RM500m in proceeds from a share placement, AirAsia will be able to position itself to grow without risking deterioration in its balance sheet. Given the lowered balance sheet risk and enhanced profitability from lowered interest expenses, we upgrade the stock to a BUY with a target price of RM1.84.

Delay of eight aircraft in 2010 will reduce capex by RM1.1b and debt by RM0.88b. AirAsia surprised the market by announcing plans to delay the delivery of eight aircraft in 2010 from 24 to 16 and the possibility of delaying another eight aircraft due for delivery in 2011-14. Previously, the company had maintained that it had no plans to delay delivery. We assume that part of the delivery slated for 2010 will be pushed to 2011 and 2012, by which time the balance sheet would have strengthened adequately. AirAsia also has plans to raise RM500m via a private placement. The net result is a 10% reduction in 2010’s interest expenses, an improvement in interest cover to 2.5x from 1.7x and reduction in gearing from 3.5x to 1.9x.

Load factors will improve. AirAsia’s load factor improved from 69.5% in 1Q09 to 74.8% in 2Q09. We believe AirAsia will be able to achieve higher loads and still achieve about 14% growth in passenger traffic for 2010 with this delay in delivery. By end-09, Air Asia will have 58 aircraft and the progressive delivery of 14 new aircraft will allow for a more gradual buildup in capacity. We have lowered our capacity growth assumption from 14% to 12% for 2010 but maintained passenger traffic growth assumption at 14%.

We estimate AirAsia will issue 400m new shares at RM1.25 each. We also upgrade 2009 net profit estimate by 4.2% to RM638m and 2010 net profit estimate by 13%. 2010 book value, net of dilution, is estimated at RM1.19. The potential impairment in receivables from its Thai associate and Indonesian joint venture still remains a risk.

Our previous target price of RM0.99 was based on peer group EV/EBITDA multiple of 6.9x. Applying the same valuation method, we now derive a target price of RM1.84. This represents a 55% premium to 2010’s book value and just 10.5x average two-year forward PE (excluding deferred tax write-backs). Upgrade to BUY.

Mah Sing - Plans RM690m project in Cyberjaya

Overwhelming response for Southgate project since its launch in 1Q08. To date, three of the blocks within Southgate, namely Vox, Vivo and Vertex have achieved 90% sales. Adding the en-bloc sale to Felda, the Southgate project has contributed about RM389m of sales (RM163m sales achieved from three blocks) for the Group. This represents about 87% of total RM448m GDV of Southgate within just one and a half year since it was launched in 1Q08.

2009 sales target met. The Group has achieved RM543m of sales to date with the en-bloc sale, thereby exceeding its 2009 sales target of RM453m as well as consistently reaching its average yearly sales target of RM500m over the past few years. In addition, this will enhance Mah Sing’s unbilled sales to RM800m.

Township development in Cyberjaya. The 115 acres of land in Cyberjaya will be developed into mid- to high-end gated residential development named Garden Residence with estimated GDV of RM690m (total housing of 760 units). Garden Residence will consist of 2-storey and 3-storey superlink houses, semi-detached and bungalows where pricing range from RM688,800 to RM1.4m or equivalent to RM234-RM438psf. The project is slated for launching in 2010.

Fast turnaround strategy still works under this project. We believe Mah Sing’s land acquisition strategy of switching from small parcels of matured areas to sizeable new township such as Cyberjaya will not affect its fast turnaround strategy as we believe that the project is still highly cash generative mainly due to: a) the project itself is already zoned for residential use and hence, the Group is able to fast track its marketing campaign as earlier as next year, and b) the project itself is saved from low cost components and infrastructure requirements which will save the Group’s land and construction cost.

More land acquisition on the pipeline. We understand that the Group is still scouring for more landbank (perhaps up to four more parcels) which are targeted for commercial and residential developments. The Group also intends to continue its deferred payment scheme (5/95 programme) as it expects the property market’s full recovery in 2H10.

We have revised up our 2009-11 net profit forecasts by 3-19% after factoring in the en-bloc sales of RM226m. However, we do not factor in the Cyberjaya development as details of the launch are not being given yet.

We upgrade our call to BUY with target price of RM2.30. Based on our target price, Mah Sing trades at 13x 2010F PE, which reflects its mid-cycle valuation. Our PE valuation for Mah Sing also reflects the Group’s asset-light and quick turnaround business model.

Genting - A lacklustre 2009; look to 2010 and beyond

We expect Genting’s 2Q09 results, due by end-Aug 09, to be flat qoq but substantially lower yoy, mainly dragged down by its leisure and plantation divisions. We expect the leisure division’s core earnings to decline 10-15% yoy but to remain flat qoq, mainly due to lower visitor arrivals amid the H1N1 pandemic, while plantation earnings should fall 67% yoy but be marginally higher qoq (+2%) due to lower CPO production and prices. The power division will improve as regional economies recover gradually. The maiden cash flow contribution from the Tangguh liquefied natural gas (LNG) plant in Indonesia will be delayed further to 1Q10 and Resorts World Sentosa’s (RWS) pre-opening expenses are expected to accelerate in 2H09.

A lacklustre 2009… We do not foresee any excitement for 2009, mainly due to RWS’ pre-opening expenses, adverse operating conditions in the UK, and the effect of the economic crisis on visitor arrivals and spending, which was further compounded by the H1N1 pandemic. We estimate RWS will incur S$200m in pre-opening expenses, mostly to be recognised in 2H09 mainly on recruitment (10,000 staff), training, sales and marketing programmes prior to RWS’ opening in 1Q10.

… so look to 2010 and beyond. We expect Genting’s earnings growth to gain momentum in 2010 and 2011, boosted by RWS’ contributions. We forecast Genting’s 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS’ contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009).

We have raised our 2010 and 2011 earnings forecasts by 18% and 19% respectively, as RWS will enable 54.4%-owned Genting Singapore (GENS) to book net earnings of S$295m and S$444m in 2010-11. However, we have lowered our 2009 earnings estimate for Genting by 10.3%, taking into account lower average selling prices (ASP) and production at its plantation unit, as well as an increase in RWS’ pre-opening costs to S$200m.

Raising target price to upcycle valuations. We have raised our target price to RM7.60, after imputing GENS’ target price of S$0.95 (based on cost of equity of 9.2% and zero terminal growth after RWS’ concession period) into Genting’s RNAV valuation while lowering its holding company discount to 10% from 20% previously. At RM7.60, it would trade at 16.0x and 5.6x 2010 PE and EV/EBITDA respectively, vs global peers’ average of 40.2x and 12.7x. Key re-rating catalysts for this stock: issuance of casino licence by the Singapore government, an earlier-than-expected opening of RWS (instead of in 1Q10), a further delay in Marina Bay Sands’ opening, and a better regional economic outlook, which would drive Singapore’s tourist arrivals.

AirAsia - Impressive 14x rise in net profit

The 14-fold rise in 2Q09 net profit is impressive considering this was achieved by cutting ticket prices by 19% to RM160 per pax and with no fuel hedging yield. This has paid off as EBIT margin rose to 33.6% vs 13.8% in 2Q09. This stands in stark contrast to SIA’s –2.5% in 1QFY10 and Cathay Pacific’s –11% for 1H09. In 1H09, pre-tax profit rose 313% to RM342.3m and net profit doubled to RM$342.3m. Out full-year estimate is now raised from RM639m to RM659m.

Limited runway capacity at LCCT. A main reason behind the delay in aircraft delivery was the shortage of parking slots. As at end-June, AirAsia is short of one slot. However, AirAsia indicated it will be offered 6-8 additional parking slots by 2010. It is also negotiating for lower handling charges with MAHB.

Associate and JV still at a loss. Both the Indonesian associate and Thai jv reported a combined loss of RM30m. Thus, there is a risk that the receivables amounting to RM890m could potentially be impaired. However, CEO Tony Fernandes indicated this should be gradually repaid over the next three years.

We raise our FY09 net profit estimate by 3% to take into account lower 1H09 costs and higher ancillary income. Our FY10 net profit number remains unchanged. Key risk is higher fuel prices and the potential impairment in receivables from its Thai jv and Indonesian associate which amount to about 30 sen/share.

Last week, we raised the stock to a BUY with a RM1.84 target price. Although we remain concerned about impairment charges, AirAsia has delivered stellar results, but trades at significant PE discount to full-service peers. While this could be due to potential impairment of its book value, we believe such a high discount is unwarranted.

Bumiputra-Commerce Holdings - ROE to hit 18% by 2011

ROE to hit 18% by 2011. Bumiputra-Commerce Holdings’ (BCHB) 2009 upgrade is very much within ours and market expectation, but the surprise is the 18% ROE target for 2011, which is well over the target for 2009. We think this is achievable given the combination of strong earnings growth and capital management. As at end-Jun 09, CIMB Bank’s CAR was 12.7% and RWCR was 13.8%.

Loan growth on track. Ytd, loan growth reached 11.6%. Excluding CIMB Thai, total loan book grew about 4.5%, slightly ahead of management’s fullyear target of 8%. We expect a 10% growth (excluding CIMB Thai) for 2009. Management highlighted that CIMB Niaga’s loan growth will make a U-Turn from a contraction of 2.2% in 1H09 to a low-teen growth by end-09. Coupled with the strong approvals for mortgages, BCHB’s full-year loan growth is ontrack to meet our expectation. Strong pipeline of deals should ensure noninterest income contribution from investment and treasury operations.

Losing deposit to recent aggressive government unit trust launches. Deposit growth is likely to be behind target due to the aggressive launch of higher-yielding national unit trust funds.
CIMB Niaga to perform better in 2H09. Despite the strong 20% jump in earnings in 1H09, management expects 2H09 to be better for CIMB Niaga, with growth supported by a) much stronger loan growth with stable margin, b) synergistic benefit from the merged entity, and c) streamlining of the investment and treasury system and operation to boost non-interest income (now only at 20% of total income vs group of 40%). In 1H09, CIMB Niaga contributes about 18% of group profit before tax.

Maintain BUY with a target price of RM12.00 based on 2.3x P/BV, which is more in line with BCHB’s historical 1-year forward PE of 13.9x (based on a 10-year average). BCHB is an excellent proxy to a rising market given its higher weightage in FBM30 of 10.69% (from 5.47% previously), and its high beta.

AMMB Holdings - 1QFY10: Set to outperform

AMMB Holdings (AMMB) reported a record profit of RM258.2m for 1QFY10. This is above our expectation. The variance is due mainly to stronger-than-expected contributions from the investment banking (IB) divisions.
Management still cautious, but talking about potential upside. Despite the strong 1QFY09 results (annualised net profit of RM1b), management is sticking to its profit guidance of RM800m-900m for FY10. Management is waiting for more convincing economic indicators behind the recent improvement. However, economic activities and the job market are likely to to pick up, we expect management guidance to be revised up by the 2QFY10 results briefing.

Non-interest income still the key upside. Performance in 1QFY10 is likely to continue. This is in line with management’s expectation based on deals in the pipeline. We are likely to see higher income generated from the following: a) brokerage income on higher trading value, b) initial public offerings, and c) higher advisory fees from debt and capital raising exercises.

NPL up, but still below expectation. Despite the uptick in non-performing loans (NPL) of RM95m qoq, NPL is below management expectation. Net NPL ratio inched down from 2.6% as at FY09 to 2.4%. Although we are still sticking to gross NPL expectation of 4.3%, this could be lower with the improvement in the economy and the job market. There could be potential upside to AMMB on lower credit charges.

We lift our FY10 and FY11 net profit forecasts by an average of 11% to an EPS of 32.3 sen and 37.0 sen respectively. We have factored in higher contributions from IB and Islamic banking (mainly from Islamic bonds issuance). We also factor in higher loan growth for FY10 from 5% to 7% considering the recent pick-up in property sales and potentially better demand for auto loans.

We upgrade AMMB from HOLD to BUY with a target price of RM5.10 (previously RM4.05) based on 1.58x P/BV (1 standard deviation from P/BV since FY06, i.e. talks with ANZ start). At RM5.10, AMMB is valued at 1-year forward PE of 13.9x (1 standard deviation from FY06 PE). We are valuing AMMB higher than its fair value based on Gordon Growth Model (fair at 1.23x BV or RM4.05) given its rising earnings growth and strong market liquidity.

AMMB is our top mid-cap pick as it offers undemanding valuation with rising earnings growth momentum. Greater impact from ANZ is likely to kick in in FY11 onwards with better market conditions and AMMB would be ready to be more aggressive with its strong capital base (Tier-1: 9.4%, risk-weighted capital ratio: 14.7%).

Sime Darby - FY09 earnings to be hit by low CPO price

We expect Sime Darby’s (Sime) 4QFY09 and FY09 results to meet our expectations. Any surprise would be on the downside, coming from potential provisioning/losses at its projects in Qatar.

Lower contribution from plantation division. Sime’s plantation division is its largest division, contributing about 60% of the Group’s pre-tax profit. This division is expected to deliver better qoq results in 4QFY09, due to higher production and average selling price (ASP) of crude palm oil (CPO). However, we believe Sime’s 4QFY09 CPO ASP will be below the industry’s average as it had already locked-in sales for its 4Q production earlier, in late-1Q09. 4QFY09 earnings will be lower yoy due to a 28% yoy decline in CPO ASP. For FY09, contribution from this division will be lower due to the following factors:

a) Lower CPO ASP. Based on Malaysian Palm Oil Board’s (MPOB) spot prices, the ASP for FY09 was 23% lower than FY08.

b) Higher fertiliser cost. Operating profit margin will be affected by record high fertiliser costs in 2QFY09 and 3QFY09.

c) Only marginal increase in production. Total production was up only marginally by 4%, driven mainly by its Indonesian estates. However, it was lower-than-expected due to the bad weather in Kalimantan in 3QFY09.

Contribution from manufacturing division to improve in 4QFY09. The manufacturing division’s operating profit margin would be hit by high cost, but is likely to turn in a small profit or break-even, with the bulk of the high-priced inventories brought forward being recognised in 3QFY09. This division is contributing about 20% of Sime’s total operating profit.

Property sales pick-up in 4QFY09 to cushion weaker sales 1Q-3QFY09. The property division is likely to perform better in 4QFY09 due to sales pickup since Mar 09. However, for FY09, operating profit contribution will be at least 15-20% yoy lower due to the lacklustre 1HFY09. For FY09, Sime has sold about RM1b worth of properties from its existing stocks through three major selling campaigns (Parad of Home) since 1 Jun 08. Of these, 60% was locked-in at end-3QFY09 and 4QFY09. Thus, 4QFY09 performance is likely to be better qoq but flat yoy.

Momentum slows at heavy equipment division. We are still expecting lower qoq contribution from this divison due to margin squeeze, although this may be somewhat mitigated by the strengthening of the Australian dollar in 4QFY09 vs 3QFY09. Also, as commodity prices moved up in 2Q09, the risk of order cancellations is now lower. For full-year FY09, this division likely to be helped by the good results in 1QFY09.

Sime is still expensive after we raise its fair price to RM7.60, pegged to 20x FY10 PE. The strong support from government-linked funds have been the driving force behind the rise in Sime’s share price. At the current price of RM8.37, the stock trades at 23x FY10 PE, which is higher than its historical average of 20x. Even pegging it to 20x FY10 PE, Sime’s target price of RM7.60 is still well below its current trading price of RM8.31. Maintain SELL.

KLCC Property - Result within expectations

KLCC Property’s net profit for 1QFY10 came in at RM60.4m, slightly up 4.3% yoy, mainly contributed by higher rental income from offices, a retail mall and car park management. Results are in line with our and consensus estimates. Rental rates at Menara ExxonMobil were revised from RM5.20psf currently to market rates of RM7psf. KLCC Property’s revenue stood at RM217.1m, slightly up by 1.4% yoy and 2.6% qoq.


Strong office rentals likely to compensate for slowdown in retail mall and hotel operations. We believe a potential slowdown at the Suria KLCC retail mall and Mandarin Oriental Hotel in FY10 due to a sluggish economy is compensated for by the strong rental reversion from the office segment. KLCC Property has locked in rental income under long-term leases with bluechip tenants for Petronas Twin Tower (Petronas), Menara Maxis (Tanjong), Menara ExxonMobil (ExxonMobil) and Dayabumi (MISC) where default risks are minimal. Moreover, the next rental revision for Petronas Twin Tower, due in Oct 09, is expected to increase rental by 9% to RM9psf. Long-term office rentals are likely to contribute about 51% of FY10 EBIT.

We maintain our target price at RM3.40 based on a 35% discount to our RNAV of RM5.37/share (which implies 0.6x target FY10F P/B against the historical average of 0.8x).

Malaysia Banking Turning more positive

Loans growth to pick up in 2H09. Loans growth in Jun 09 slowed down to 8.3% yoy from 8.9% in May due to a contraction in business loans. Business loans make up about 45% of total banking loans. A shrink in credit extended to the manufacturing and commercial sectors will continue to put pressure on loans growth. However, loans growth momentum is expected to pick up in 2H09 due to the strong recovery in loan applications and approvals since March.

Mortgage approvals at new high. After six months of decline, approvals for mortgages start moving up since Mar 09 and have hit a new high of RM7.1b (+14% mom and 34% yoy) in June. This is attributable to the recent pick-up in new launches after developers have been holding back since 2Q08. This will translate into stronger loans growth in 2010.

Proactive measures to mitigate deterioration in asset quality. Nonperforming loans (NPL) were down by RM423m qoq due to a drop in household NPLs. After two consecutive quarters of uptick, mortgage NPL eased by RM258m qoq in 2Q09. We are unlikely to see a sudden surge in NPL as previously expected because BNM and banks have been active in restructuring stress loans to reduce the monthly repayments. BNM is also reactivating the Corporate Debt Restructuring Committee (CDRC) for the resolution of distressed debts of large corporations.

Capital still strong. Capitalisation for the sector remained healthy as evidenced by both the risk weighted capital ratio and core capital ratio of 14% and 12.3% respectively. In June, aggregate capital base had increased 1% as a result of capital management exercises by several institutions. The net non-performing loans ratio remained stable at 2.2% while the aggregate loan loss coverage ratio also stayed high at 89.5%.

We are reviewing our UNDERWEIGHT weighting on the banking sector. We are now turning more positive as earning risks are declining as domestic economic activities start to pick up on the back of more aggressive government spending to boost business and consumer confidence. We also take into consideration significantly improved liquidity with the launches of Amanah Saham funds (the extremely well received RM3.33b launch and last week, the RM10m 1Malaysia Fund).

AMMB - Potential higher dividend payout

Greater opportunities in non-interest income, driven by: a) improvement in equity trading volume – a boost to brokerage income, b) removal of 30% bumiputera requirement in initial public offerings (IPO), which will boost IPO demand, and c) higher advisory fees following the easing in regulations for debt and capital raising exercises.

Lower default risk, but greater impact in FY11. Although management maintains its net non-performing loans guidance of 4% for FY10, default risk is now lower with the improved economic outlook and return of employment opportunities.

Better HP margin. The recent hike in hire purchase (HP) rates is definitely a positive for AMMB given its 40% exposure to auto loans. With the adjusted HP rates, AMMB can now focus on growing this business segment.

Potential higher dividend payout from active capital management. For FY10, we expect DPS of 10 sen, based on a 35% payout, higher than FY09’s 8 sen. With its excess capital, AMMB could declare even better dividends. A dividend policy may be announced after this financial year, with a payout likely to be in the range of 40-50%.

We lift our FY10 net profit forecast slightly by 4.8% from RM845m to RM885.4m to factor in the slightly improvement in loans growth of 5% (previously 3%).

Upgrade to HOLD with fair price of RM4.05. Our fair price is derived from the Gordon Growth Model (ROE: 13%, payout ratio: 40% (previously 35%) and required return: 10%). This implies a forward P/B of 1.23x, in line with its historical average P/B valuation. AMMB is our top mid-cap pick as it offers the cheapest valuation with potential earnings upside from the strengthening capital market and improved HP margins.

British American Tobacco - 2Q09: Sharp volume contraction

2Q09: Net profit of RM201.2m (1H09: RM407.2m) was in line with consensus and 51% of our full-year forecast. Gross profit fell 7.5% yoy and 6.8% qoq to RM377.0m, but net profit improved 3.1% yoy due to sharply lower operating costs (-22% yoy and -19.4% qoq), which we attribute partly to lower A&P expenses. Product mix improved as its Global Drive Brands’ (GDB) market share rose 3.1ppt to 54.7% in 1H09. An interim dividend of 113 sen/share (gross yield: 3.4%) was declared, similar to 2Q08’s.

BAT’s sales volume contracted 13.9% vs industry’s 11%, worse than our original projection of a 10% contraction, due to consumer down-trading and the initial kneejerk reaction to the implementation of pictorial health warnings in March. We maintain our forecast for sales volume to contract by 6.5% yoy in FY09 as 2H09’s volume decline should moderate as the economy picks up, although we acknowledge the potential downside to our forecast.

Much more moderate excise duty hike anticipated. Going forward, we think it is unlikely for the government to repeat the past two years’ hefty excise duty hike of 20-25% on cigarettes. Instead, the duty should be around 10-15% as the government may be compelled to limit the high incidence of illicit trade (which could potentially be higher than 30%). Currently, the excise duty is 18 sen/stick.

Carlsberg Malaysia - Singapore acquisition

Carlsberg Malaysia has entered into an MoU with parent, Carlsberg A/S, to acquire 100% of Carlsberg Singapore for RM370 mn. This related party transaction will be put up for minority shareholder vote in late October. We view the deal positively, the price tag is fair, offers significant potential upside to future earnings and allows Carlsberg Malaysia to diversify geographically.

The price tag of RM370 mn implies a transaction P/E of 15.4x, based on Carlsberg Singapore’s actual FY08 net profit. However, at an analyst briefing Wednesday, management indicated that merger synergies could conservatively amount to RM22 mn in 2010E. The potential synergies are likely to result from Malaysia assuming contract manufacturing for Singapore (versus an external producer in Thailand) and lower logistics cost. Malaysia will not require any additional capex to take on the Singapore manufacturing contract.

Taking the contribution from Carlsberg Singapore and potential merger synergies into account, there is as much as 47% potential upside to Carlsberg Malaysia’s FY10E net profit, translating into a P/E of 11.3x. This is 23% below the market’s FY10E P/E of 14.7x. Even if the merger synergies are half of what is expected, there is as much as 22% potential to Carlsberg Malaysia’s FY10E net profit.

Carlsberg Malaysia had slashed its FY08 dividend payout to just 37% (from 99.5% in FY07) when it decided to look out for potential acquisitions. One of the terms of the transaction is a proposal for a dividend payout of 50-70%, which implies FY10E net dividend yield of 4.4-6.2% based on the prospective post-acquisition net profit base. This is attractive compared with the market’s net yield of 3.6%.

We upgrade Carlsberg Malaysia to an OUTPERFORM from Underperform with a new target price of RM5 (from RM2.80 previously). This spells 18% potential upside from current levels. Despite having risen 10% Wednesday, the stock has underperformed the market by 18% since our February 2009 downgrade.

Kossan Rubber Industries - Punished by forex contracts

Share price dips on concerns of forex losses, which have already been factored in the consensus forecasts, provide buying opportunity. Strong core earnings in 2010. Maintain BUY and target price of RM4.24

Share price battered after hitting a 52-week high. Kossan hit a 52-week high following a slew of earnings surprises by other glove manufacturers. We believe the surge in net profits of Top Glove and Supermax, +61% yoy and 90% respectively, was mainly due to additional orders from customers which held back purchases in 1Q (prior to the H1N1 viral outbreak) in anticipation of lower latex prices. Buyers are now refilling orders as glove prices are expected to increase. Current latex prices have risen 10% from the low in 2Q09.

Undue selling pressure from concerns on forex losses. The market appeared surprised by last week’s revelations that Kossan had booked an estimated RM12m in hedging-related forex losses in 1Q09 (84% of 1Q net profit), causing the share price to fall by 10%. The forex loss was recognised as ‘other expenses’ and/or as other costs items in Kossan’s accounts during the February reporting season. The 4Q09 accounts also revealed that Kossan had entered into forex contracts, hedging 67% of 4Q08’s receivables (amounting to RM107m) at an average of RM3.37/US$. The differential between 1Q09’s average and hedged exchange rates (i.e. when the US dollar appreciated) triggered the loss.

Diminishing forex losses in subsequent quarters, from balance estimated forex exposure equivalent to RM120m-140m ... Assuming that the company’s currency hedging policy covers 12-14% of 2009 revenues, the outstanding hedging contracts (which we understand is structured to expire in Nov 09 or earlier) amount to around RM120m-140m. Hence, 2Q09’s realised forex loss should be significantly lower qoq at around RM9m, even assuming the same face amount of exposure as in 1Q09, as the greenback has retreated over 2% from 1Q09 average rate.

with potential gains should the Ringgit appreciate. Based on our above assumptions, Kossan would realise a cumulative hedging loss of RM14.5m in 2009 if the Ringgit averages at RM3.55/US$. Should the Ringgit appreciate above the RM3.37/US$ mark before the hedging contracts expire, Kossan will recognise a gain on the outstanding forex exposure.

M&A opportunities and locking in long-term contracts. As the present market dynamics still favour a market consolidation, rubber companies like Kossan could be in the position to acquire smaller privately-held but profitable manufacturers. We also reckon that Kossan is likely to enter into long-term contracts with its buyers, thus raising its earnings visibility.