Insider Asia’s Stock Pick: Kossan Rubber Industries

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Kossan Rubber Industries Bhd
The recent spread of Ebola has threatened to turn the African viral outbreak into a global epidemic. Ironically, Malaysian rubber glove makers stand to benefit if the situation gets worse, as demand for rubber gloves will rise. Among the players, Kossan appears an appealing investment proposition.

The company stands to benefit from higher demand due to an aggressive expansion exercise. Its annual production capacity will increase by 38% from 16 billion pieces at end-2013  to 22 billion pieces by November 2014, giving a strong boost to earnings going forward. As such, its current trailing 12-month P/E ratio of 19.9 times should compress along with expanded output and margins.

In 2013, Kossan shifted its production capacity to produce more nitrile gloves, which offer better margins compared to natural rubber gloves. With the recent drop in crude oil prices, margins should expand as nitrile’s raw material costs drop. The company has also diversified into Technical Rubber Products (TRP) that will tap into Malaysia’s construction spending. TRP accounted for 13% of Kossan’s sales in 2013.

The company’s return on equity (ROE) of 20.8% in 2013 was one of the highest in the industry, thanks in part to its consistently high capacity utilization rate of over 85%. In comparison, Top Glove’s ROE stood at 15.2% in FY Aug 2013, while that of Supermax was 13.8% in FY2013. Kossan also had one of the highest EBITDA margins, at 18.0% in FY2013, followed by Supermax (15.8%) and Top Glove (13.5%).

Kossan’s expansion into TRP has made it the country’s largest TRP manufacturer with annual capacity of 10,000 tonnes, and the ability to tap into more construction projects. It stands a good chance to secure more contracts from the remaining two MRT lines, after securing the deal to supply TRP bearings for the first Sg Buloh-Kajang Line.

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This article first appeared in The Edge Financial Daily, on October 15, 2014.