Kossan aims for RM2 billion turnover by FY2015

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IN a year of subpar performance among the “Big Four” glove makers — Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, Top Glove Corp Bhd, and Supermax Corp Bhd — Kossan has been touted as having the best upside earnings potential.

While the sector is experiencing headwinds, including falling average selling prices (ASP) as well as further hikes in manufacturing costs, the company remains optimistic that it will exceed analysts’ expectations, which would imply a record turnover and net profit for financial year 2015 ending Dec 31.

In a reply to The Edge, general manager of corporate affairs and business development Edward Yip reiterates that the glovemaker will be able to maintain its profit growth trajectory in spite of the challenges the industry is facing.

Earnings in FY2015 are expected to receive a boost with contribution from three new plants. The first two plants will be fully operational this year while the third will be commissioned in January next year.

At a recent analyst briefing, Kossan’s management highlighted its confidence in exceeding revenue expectations. Several research houses have forecast full-year revenue of between RM1.7 billion and RM2 billion for Kossan by FY2015.

Yip does not discount the possibility of the group breaking the RM2 billion mark in revenue by next year. “We are confident of delivering stronger bottom line growth. While ASPs have been going down due to cheaper raw material prices, our margins are still seeing an upward movement.”

Analysts are bullish on Kossan’s prospects. In a Sept 17 note, AmResearch says the company’s net profit over the next three financial years (FY2014 to FY2016) is expected to grow at a compound annual growth rate (CAGR) of 23%, or double that of its peers.

Moreover, fears of oversupply in the nitrile gloves segment seems to have largely abated. An industry report by Affin IB Research in July says that assuming annual demand growth of 8% to 10% per annum over the next four years, global demand for nitrile gloves will continue to outstrip supply, albeit at a moderate pace.

“Nowadays, it’s no longer just a volume game [among the glove makers]. Kossan has successfully enhanced its competitiveness due to an emphasis on technology, with more resources allocated toward revamping old production lines as well as for research and development initiatives,” says Yip.

Kossan has coped well with the pressure on ASP over the past year, mainly due to stiff competition in the nitrile segment. Improved efficiency as well as a revamp of its production lines is already showing results in the group’s bottom line.

While the company reported flattish revenue over the past two years, its net profit actually grew 33.5% y-o-y to RM136.4 million in FY2013, from RM102.16 million the year before. Bucking the industry trend, Kossan’s profit margins increased over the two-year period (FY2012 and FY2013), while the other three glove makers saw a decline in margins.

This is again evident in the company’s earnings result for 1HFY2014. For the period, Kossan reported a net profit of RM71.43 million on revenue of RM610 million, compared with RM66.63 million and RM648.84 million respectively, in 1HFY2013.

This means that its profit margin for 1HFY2014 had grown to 11.7%, compared with 10.2% in 1HFY2013.

Yip further explains that additional costs arising from the recent tariff hikes on electricity and natural gas rates this year were successfully passed through to customers. The company is also moving up the value chain with its focus on nitrile production, which is targeted to form 80% of its total product mix by 2016.

Aside from higher margins and lower raw material prices for nitrile gloves, Kossan’s new production plants are mostly automated, thus adding to further savings from a decline in labour costs.

Yip dispels concerns that an oversupply situation may happen in the nitrile segment, which is currently dominated by Hartalega. Kossan is aiming to become the world’s top producer of nitrile gloves by the end of this year with an annual capacity of 15.6 billion pieces.

The company’s approach in sales is to market its new products before the new production lines come in, thus ensuring that the added production capacity will be fully taken up, he says.

“The capacity expansion and the focus on nitrile are based on market requirements. In the past, glove makers had made the mistake of over-expanding without having the capability to sell the products. Given our transparent pricing mechanism and good relationship with major clients, the company has a clear earnings visibility over the next two to three years.”

Interestingly, the venture into nitrile is not Kossan’s sole avenue of growth, which is the case for many of its competitors. The group’s technical rubber product (TRP) division is proving to be a growing contributor to overall group revenue. In 1HFY2014, the segment contributed RM80 million to revenue or 13% to the group’s overall revenue.

Yip notes that the group’s TRP offerings were used during the construction of the Second Penang Bridge as well as in the ongoing Klang Valley Mass Rapid Transit project.

“While margins from TRP are lower than glove production, the long-term nature of the supply contracts ensures recurring earnings. There will be more mega infrastructure projects on the horizon, so we do foresee increased exposure in this segment.”

Kossan is already the largest TRP manufacturer in Malaysia and is keen to expand the segment. The group is currently preparing a foray to build a TRP plant in Indonesia, which would enable it to leverage the country’s growing demand for the product in the infrastructure and automotive industries, Yip says.

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.