All-round positivity on Kossan’s earnings growth
KUCHING: There is an all-round positive outlook on Kossan Rubber Industries Bhd’s ( Kossan) earnings growth ahead due to the group’s expansion plans.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), volume sales from new capacity coupled with better efficiency from new plants are expected to offset any average selling prices (ASPs) pressure.
“We are positive of earnings growth ahead since Plant 16,17,18 and 19 are expected to be fully taken up,” Kenanga Research said.
“We expect volume sales from new capacity coupled with better efficiency from new plants to offset any ASPs pressure.
“Looking ahead, Plant 16 is expected to anchor subsequent quarters’ earnings, which was fully commissioned in August 2018. It has an installed capacity of three billion pieces per annum and will focus on the group’s patented Low Derma Technology gloves.”
Additionally, the research arm noted that the group has started commercial production of Plant 17 (1.5 billion pieces) in November 2018.
“Construction works for Plant 18 (2.5 billion pieces) and Plant 19 (three billion pieces) are currently on- track, with expected full commissioning by the second quarter of 2019 (2Q19) and 4Q19, respectively.
“Upon completion, these three new plants will add additional seven billion pieces of gloves per annum, bringing the group’s total installed capacity to 35 billion (up 25 per cent) pieces of gloves per year by end financial year 2019 (FY19).”
Kenanga Research highlighted that the next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location, that is, an integrated glove manufacturing facility, over the medium and longer term.
It further highlighted that the group expects the expansion, which is currently in the planning stage, to commence in 2020 and take eight years to complete.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) also believed that these plants will contribute strongly to Kossan’s earnings going forward driven by the robust demand for glove product.
“We believe that earnings growth for Kossan will be supported by high demands for glove and its ability to keep with these demands as seen in its expansion plan,” MIDF Research said.
“Moreover, we opine that utilisation rate will not be significantly impacted due to the aggressive expansion going forward as new capacity will be fully taken up within a quarter.
“With the newer plants, the group is targeting to further improve the efficiency level to 1.8 workers per million gloves by the second half of FY19 (2HFY19), from the current level of three workers per million gloves.”
The research arm opined that this will further improve Kossan’s profit margins.
On another note, AmInvestment Bank Bhd (AmInvestment Bank) pointed out that Kossan’s product mix has shifted further towards nitrile with a nitrile-to-natural rubber split of 75:25.
“We believe Kossan will be facing some margin pressure stemming from heightened competition in the nitrile space as the big rubber glove producers ramp up their nitrile gloves capacity expansion (up 14 per cent in FY19),” AmInvestment Bank said.
However, the research firm anticipated Kossan’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin to remain around similar levels of circa 16 per cent in FY19F.