Kossan Rubber Industries Bhd
(Sept 19, RM6.40)
Maintain buy call with an unchanged target price (TP) of RM8.55: Kossan Rubber Industries Bhd launched its new patented Low Derma Technology (LDT) recently, which makes it the first Malaysian glove manufacturer to be granted the “low dermatitis potential” claim by the US Food and Drug Administration (FDA). We deem the accomplishment will add value to the company’s image as one of the world’s largest glove original equipment manufacturers. This is a testament to its mission of continuing to build strong research and development capability going forward.  

Healthcare personnel have suffered from protein allergy (Type I) which arises in the usage of natural rubber gloves decades ago which cause allergic reaction on the skin with itchy patches, wheels or hives. Hence, the powdered-free natural rubber (NR) gloves and synthetic gloves (predominantly nitrile gloves) have been widely regarded as a substitute of NR gloves that could minimise allergic reactions. Notwithstanding that, another form of allergy (Type IV) arose subsequently from the chemical accelerators and other additives used in the production of nitrile, latex and non-latex gloves that causes contact dermatitis on the users’ wrists and the back of their hands.  

Over the years, glove manufactures have been undergoing trials and tribulations to solve the Type IV allergic reaction of the use of synthetic gloves, which are seen to be a good substitute of NR gloves. Today, the efforts have borne fruits when Kossan officially launched its LDT by introducing Chemax 7th sense gloves. These nitrile gloves are produced without using added components (sulphur and chemical accelerators) that cause Type IV allergy during the vulcanisation stage of glove manufacturing. The non-sterile gloves also provide better tensile strength, thermal stability and durability without compromising barrier properties.   

Being the first in the world to be approved by the FDA, Kossan’s Chemax 7th sense gloves are expected to enjoy first-mover advantage, particularly in developed countries. Hence, the company is likely to enjoy certain premium over the product’s selling price. In addition, this could lift the company image of Kossan as a “segment leader” in the glove industry. We understand that the application of LDT had been submitted to the FDA three to four years ago before it gained a nod; nevertheless, we are yet to quantify the demand or sales contribution of this new product for now until the next few quarters after response shows in the market. We believe more glove companies will introduce LDT gloves in the near future and that could lead to a “wait-and-see” approach by hospitals (the buyers) that probably would delay procurement until more substitutes appear in the market. We make no changes in our earnings forecasts, maintaining financial year 2016 (FY16) and FY17 profit after tax at RM220 million and RM264 million respectively.  

We maintain our TP at RM8.55 based on a targeted price-earnings ratio of 21 times pegged at FY17 earnings per share of 41 sen. The recent launch of LDT has reflected Kossan’s unremitting effort in product innovation and enhancing the properties of gloves to combat the downsides of its product offerings. — M&A Securities, Sept 19