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Kossan Rubber Industries Bhd
(Jan 14, RM5.10)
Maintain “buy” with a higher target price (TP) of RM5.50 from RM5.05:
Construction works for the three new plants have been completed, with two of them (Plants 17 and 18) already up and running. The third plant (Plant 19) is slated to be fully operational by February 2015.

Together, these plants will add six billion gloves to the group’s annual capacity. We understand that Kossan has already secured buyers for a significant portion of these additional outputs.

As such, management is confident that it will maintain utilisation rates at 82% to 85% going forward.

Next, Kossan will set up in Meru, Klang, two plants (Plants 20 and 21) with a combined annual capacity of 3.5 billion gloves.

Construction works are expected to begin in the first quarter of 2015 (1Q15), with targeted completion by 2Q16 and 3Q16.

We only imputed a three-month contribution for these two plants.

We revised our foreign exchange assumptions to RM3.27, RM3.41, RM3.41 per US dollar for financial year 2014 (FY14), FY15 and FY16, respectively, to bring it in line with DBS Vickers’ internal forecasts.

On doing so, we revised our average selling price assumptions downwards, as Kossan will pass on some of the benefits from the stronger dollar to its customers.

Also, we revised the sales volume growth to 30% for FY15 (previously 20%), to bring it in line with the capacity growth (increase of 31% year-on-year).These adjustments, together with the contribution from Plants 20 and 21, lead us to raise our FY14, FY15 and FY16 forecasts by 5%, 10% and 12% repectively.

We retain our “buy” rating with a revised RM5.50 TP based on 18 times FY15F earnings per share, an increase of two standard deviation to five-year mean price-earnings ratio. — Alliance DBS Research, Jan 14

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This article first appeared in The Edge Financial Daily, on January 15, 2015.

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