BASED on report from Affin Investment Bank on Glove maker Kossan Rubber Industries BHD, the company will achieve an EBITDA (earnings before interest, tax, depreciation, and amortisation) within a healthy range of 18.2% to 18.4% over financial years 2013-2015 against the previous year’s 15.4% turnout. This outlook has placed Kossan in a good standing amidst a potential pricing competition in the gloves industry resulting in lower average selling prices.
“This is due to the stronger sales growth in its higher margin speciality gloves products example surgical gloves, which contributes circa 8% to Kossan’s total revenue currently (6% in 2012) and improved operating efficiencies thanks to management’s continuous effort in plant automations through research and development investment.
Note that this also coincides with management’s aim to sustain its EBITDA margins of at least 18% going forward, ” Affin said, following a meeting with KOssan, that it reaffirmed its positive view on the glove producer.
It added: “Key takeaways from the meeting include an additional 120 million pieces of gloves coming on stream in December 2013, further glove capacity of 5 billion pieces by end-financial year 2014, a stable margin environment from higher volume sales in its higher margin technical rubber products despite lower selling prices due to lower raw material cost; and a total capital expenditure (capex) allocation of circa RM70mil to RM75mil per annum over the next three years for the building of six to seven new plants on a 56-acre piece of land in Batang Berjuntai.
We are forecasting a revised financial year 2013 net profit growth of 34% year-on-year (yoy) compared to our earlier forecast of 16.9% year on year.
Our financial years 2013 to 2015 earnings per share (EPS) revision of 13.6% to 23.5% takes into account an upward revision in our gloves production assumption to 16.12 billion and 21 billion pieces (from 15.6 billion and 19 billion pieces) in financial years 2013 and 2014 respectively and lower cost assumption as Kossan produces higher niche products.
To cater to the rising volume sales, Kossan’s production capacity expansion will be beefed up, targeting a revised total capacity of 21 billion pieces by end-financial year 2014. Recall that this is in contrast with management’s initial projection of 19 billion pieces.
Notwithstanding the capacity ramp-up, plant utilisation will be sustained at 80% to 85%, for upgrading activities on its older production lines.
We gather that Kossan’s new production lines will be highly versatile and interchangeable. In this regard, Kossan has no problem in delivering either natural rubber or nitrile gloves depending on customers’ need (Kossan’s current product mix is 48:52 for natural rubber and synthetic rubber due to the continuing demand shift from natural rubber to nitrile gloves).
Backed by resilient growth in volume demand, favourable raw material prices attributed to soft auto sales growth in China, Kossan’s healthy plant automation to boost operating efficiencies and management’s efforts in ramping up its speciality gloves which typically fetches lucrative margins, we remain positive on Kossan’s prospects going forward.
Following our EPS upgrade, our revised target price for Kossan is RM6.90 from RM5.28, pegged to an unchanged 12.5 times financial year 2014 EPS. We maintain our “buy” call.
Though Kossan’s share price has appreciated sharply by 49% since we upgraded the stock from “add” to “buy” rating on April 11, we reckon that Kossan’s current valuation at 10 times financial year 2014PER is still highly undemanding.”
Overall, Affin said that its recent meeting with Kossan’s management reaffirmed its positive view on the company.