Kossan Rubber Industries Bhd 
(July 21, RM6.85)
Maintain neutral with a higher target price of RM7.08 from RM6.35 previously: Kossan shared its plans to build five plants on the 57 acres (23.07ha) of land in Batang Berjuntai, which was purchased back in February 2013.

Construction could start as early as the second half of 2016, with capacity gradually coming online throughout financial year 2018 (FY18) to FY21.

After that, its total glove capacity will more than double to 50 billion pieces per annum from 22 billion pieces currently.

The management expects a stronger earnings profile in the second half of FY15, on the back of stronger contributions from Plants 2 and 3, a higher degree of automation and more effective cost control.

While it initially did not anticipate any glove capacity expansion in 2016, it now expects up to an additional capacity of one billion pieces as a result of the revamping of old manufacturing lines during the year.

We believe that margin improvements going forward will be sustainable, on the back of improving operating efficiencies as well as a higher mix of nitrile gloves.

Kossan also shared that the impact of the recent increase in natural gas tariffs — to RM21.80 per million British thermal units (mmBtu) from RM19.77 per mmBtu — would be manageable as the cost could be passed through to its clients within one to three months.

Natural gas accounts for 6% of the company’s total costs.

After adjusting our assumptions, we upgrade our FY15 to FY24 earnings forecasts by 3% to 16%.

The key downside risk to our forecasts remains the heightened competition within the industry that could lead to lower average selling prices  and margins, while the upside risks include a further weakening of the ringgit. — RHB Research, July 21

This article first appeared in The Edge Financial Daily, on July 22, 2015.