KOSSAN RUBBER INDUSTRIES BHD

Target Price: RM9.10

MAYBANK Investment Bank Research (Maybank IB Research) has upgraded Kossan Rubber Industries Bhd to a “buy” from a “hold” previously, with a target price of RM9.10 (26% upside).

The research house said Kossan’s third quarter 2017 results could be better on lower raw material costs.

Maybank Investment expects the glove maker’s new capacity in the fourth quarter to support its earnings growth ahead.

Given the certainty of the new capacity coming on board to provide growth and the present tight glove supply situation, Maybank IB thinks the stock deserves to be re-rated to a higher multiple and pegged it at 24 times on 2018 EPS.

It also maintained its EPS forecasts, projecting three-year EPS CAGR of 17%.

While the company is expected to release its third quarter results on Nov 24, Maybank IB also thinks that sales volume of gloves could be flattish quarter-on-quarter, as it is already running at its full plant utilisation rate of 85% and had zero new capacity to sell in the quarter.

“However, margin may improve on lower raw material cost.

“Hence, we expect its earnings to be better in the third quarter of 2017,” Maybank IB said.

Kossan had commercialised six lines at Plant 16 (total of 8 lines) in November and upon full commercialisation in December, its capacity will rise to 25 billion pieces per annum (up 14% from 22 billion pieces now).

Given the present tight supply environment, the new capacity from Plant 16 is already fully sold and the capacity could be used for the production of higher margin gloves (ie LowDerma glove).

In 2018, Kossan will commercialise Plant 17 (adding 1.5 billion pieces per annum in third quarter of 2018) and Plant 18 (three billion pieces per annum in fourth quarter of 2018).

Therefore, over the medium term, Kossan may see its margin expand as it raises its productivity, while the company manages cost efficiently via reducing its headcount and raw materials and utilities.