Kossan gets upgraded to buy amidst undemanding valuations
KOTA KINABALU: Kossan Rubber Industries Bhd’s (Kossan) recent share price drop has sparked the research arm Affin Hwang Investment Bank Bhd (Affin Hwang Capital) to upgrade its call on the stock form ‘Hold’ to ‘Buy’ as they believe the stock’s current valuations are undemanding and have priced in some headwinds that the group will experience in the short-term.
Since mid-2017, Kossan’s share price has been on an uptrend with it peaking at RM8.77 on Jan 25. However the stock soon saw some share price weakness as it plunged by 27 per cent to RM6.40 on April 27.
AffinHwang Capital opined that the recent share price weakness has caused current valuations of the stock to be undemanding and has helped price in the capacity delays.
The capacity delays are the commissioning delay of Kossan’s completed Plant 16 and delays of completion of the groups Plants 17 and 18.
“Despite the setback of plant 16, management targets the plant which has a capacity of 3 billion pieces per year to be able to operate at full capacity by July 2018, which will add around 13 per cent to its current capacity.
“Although Kossan has missed our initial schedule, management has guided that they are still on track to achieve 47.5 billion pieces per year by 2023, starting with completion of Plant 17 by end-2018, followed by Plant 18 by mid next year.
“As subsequent expansions are based on Plant 16, we expect limited delays in the completion of Plants 17 and 18,” said the research arm in a securities note.
While the new capacity would improve the group’s earnings growth in the long-run, AffinHwang Capital opined that for the first half of 2018 (1H18), earnings growth is expected to remain flat as the new capacity would only start full production by July and current operating levels are already above the 85 per cent utilisation rate.
Once the new capacity kicked in, Kossan’s management was confident the new capacity will be fully taken up as they believe the current demand growth still outstrips capacity growth.
“This is due to conversion from vinyl gloves to other alternatives like tlatex or nitrile gloves. As Such, we believe that earnings growth at a low to mid-teens level for the next 3-years is sustainable,” said the research arm.
Everything considered, AffinHwang Capital upgraded its ‘buy’ call on Kossan with an unchanged 12-month target price (TP) at RM8.40, based on an unchanged 22 fold price earnings ratio now applied to our earnings per share for 2019E.
Despite the call upgrade, the research arm states that their top picks for the rubber product manufacturing sector still remain Supermax Corporation Bhd with a TP of RM2.90 and Top Glove Corporation Bhd with a TP of RM9.80.