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Kossan Rubber Industries Bhd
(Oct 8, RM4.24)
Maintain outperform with target price of RM5.23:
We believe Kossan’s new glove production lines could lead to higher margins due to improved productivity and efficiency. The lines are designed to focus on larger orders with fewer clients (compared with the previous production scheduling model) for a single product type and specification, thus reducing idle downtime for frequent machinery setting adjustments to accommodate diverse specifications.

This could lead to an output of 35,000 pieces of gloves per hour, which is higher than its existing average production line speed of 29,000 gloves per hour; a robust 20% enhancement.

Its current production style comprises shorter production lines catering to a large customer base with diverse products, which reduces reliance risk on a few larger clients. However, such an arrangement limits margin expansion due to more downtime on frequent machinery setting adjustments.

Three plants with a total of 17 production lines producing six billion pieces of gloves will be completed in various stages. Plant 1 with five lines was completed in June with commercial production in August this year.

The remaining Plants 2 and 3 with a total of 12 lines are expected to be operational in September and November; and scheduled for full commercial production in November this year and January 2015, respectively.

These three plants, when fully operational by end-2015, will enlarge installed capacity by 38% from the existing 16 billion to 22 billion pieces of gloves per annum. Plans are in place to add two new plants with five billion pieces capacity in financial year 2015 (FY15) which would boost FY16E earnings.

With these planned capacities, Kossan’s nitrile butadiene rubber:net rubber mix is targeted to shift from the current 57:43 to 80:20 by FY16. We have already factored in the FY14 delay into our earnings model.

We are raising our FY15E earnings forecast by 8% taking into account margin expansion (earnings before interest taxes depreciation and amortisation (Ebitda) margin raised from 17.8% to 19.5%) emanating from the new plant’s production scheduling strategy and introducing our FY16E numbers.

Correspondingly, our target price is raised by 8% from RM4.86 to RM5.23 based on unchanged 16 times FY15E revised earnings per share. We maintain our outperform rating. — Kenanga Research, Oct 8

Kossan


This article first appeared in The Edge Financial Daily, on October 9, 2014.

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