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Tuesday, July 26, 2016

Brokers Report: Kossan Rubber Industries Bhd - Safe and strong

Maintain our Outperform call with an unchanged target price (TP) of RM8.50

Our recent meeting with Kossan’s management reaffirmed our belief that Group’s expansion plans and operational improvements are on track. 

We believe our Outperform recommendation for Kossan will be supported by i) continuous improvements in productivity and efficiencies through R&D initiatives, reflected through its growing margins over the years (from 7.6% in 1QFY12 to 12.4% in 1QFY16 - Figure 1), ii) diverse product range, and iii) most of the additional capacities for new products contribute by FY18 onwards.

Widening product mix. Under immense competition, Kossan continues to improve their products to differentiate themselves. For instance, they introduced and patented its latest “accelerator free” nitrile glove, which minimizes latex protein and chemical allergies. We are also positive on other new innovative offerings which are expected to be launched by end-2016.

Continuously improving efficiencies. To recap, Kossan formed a JV company, Aseptapak (M) Sdn Bhd with its UK partners, to acquire the latest technology in automated packaging machine since February. This new automated packaging machine with advanced technological features will be adopted in its upcoming plant. Some of these features include contamination prevention during the dispensing process. Together with automation, Kossan’s new plant will feature higher speed production lines which only requires a third of the number of workers versus its old plants. We are encouraged by this move as the group can re-designate its workers to other areas and thus would be less impacted by the shortage of workers issue following the Government’s policy to freeze hiring foreign workers. Kossan’s target is to further reduce headcount from 2.9 workers per million gloves to 2.2 workers per million gloves by FY18.

Capacity expansion. All existing plants are currently running at maximum capacity (above 80% utilization rate) and have thus limited the Group’s ability to take on additional orders for its new products. Kossan is therefore planning to double its current capacity to 43.0bn pcs over the next five years. 3.0bn nitrile gloves capacity is targeted to commence in 3QFY17, while another plant housing 4.5bn pcs capacity will begin construction by end-2016 and targeted to complete by 1QFY18. Total capex is estimated to be RM120-150m/year. The prudent expansion plans also includes upgrading its older lines on a staggered basis once the new capacity comes on-stream.

Source: PublicInvest Research, 26 July 2016

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