KOSSAN Rubber Industries Bhd’s shares hit an all-time peak of RM6.43 last Tuesday, leaving investors wondering just how much upside is left in the counter.

Trading at a trailing price-to-earnings ratio (PER) of 27.6 times, the glovemaker’s shares are more expensive than its peers — Top Glove Corp Bhd and Supermax Corp Bhd — which are trading at 18.6 times and 13.3 times, respectively. Hartalega Holdings Bhd, however, is priced at 29.6 times.

In a recent interview with The Edge, Kossan managing director and CEO Datuk Lim Kuang Sia insists the stock valuation is “fine” as future earnings growth will be supported by strong global demand.

Moreover, Kossan (fundamental: 2.1; valuation: 0.5) has an ambitious plan to invest RM600 million to double its annual production capacity to 44 billion pieces of gloves by 2020, and thus expects better profit in the coming years.

Its share price has outperformed that of its peers, gaining 39% year to date to close at RM6.21 last Thursday, giving it a market capitalisation of RM3.97 billion.

Hartalega (fundamental: 2.6; valuation: 0.9) is the industry’s heavyweight with a market capitalisation of RM6.52 billion; its share price has advanced 14% year to date.

The shares of Top Glove (fundamental: 2.5; valuation: 1.3) have risen 20%, giving the company a market cap of RM3.34 billion, and those of Supermax (fundamental: 1; valuation: 1.4) by 18%,  for a market cap of RM1.34 billion.

It is worth noting that since Kossan was featured by The Edge Research as Insider Asia’s stock of the day on April 13, its shares have gained 7.6%.

While investors wait for a new catalyst that could push the stock higher, some analysts who track the glove industry see little upside for Kossan in the near term.

RHB Research Institute head of research Alexander Chia Hock Lon advises investors to consider “reallocation” if they have more compelling opportunities.

“At current levels, we would advise retail investors who have yet to buy into this counter to wait and buy on dips. Like any defensive sector, we believe the rubber glove industry might take a backseat should investor interest return to cyclical sectors from an increase in risk appetite,” he says.

Kossan’s current share price, he adds, reflects the potential earnings stream from its upcoming capacity expansion, as well as the favourable current macroeconomic environment, including lower raw material prices and the stronger US dollar.

RHB Research had on May 22 downgraded its call on Kossan from “buy” to “neutral”, with a revised target price of RM6.35 as most of the positive news has been priced in.

Meanwhile, a research analyst with a local investment bank says those who wish to invest in Kossan should wait as the stock looks quite expensive at the moment due to its high PER.

“But then again, considering that Kossan has always delivered good earning, it deserves a premium valuation and thus, I don’t think the shares are overvalued,” he adds.

According to Bloomberg, nine research houses give Kossan a “buy” call, seven “neutral”, and only one with “sell”. The average target price of  the 17 research houses was RM6.42.

It is notable that Kossan overtook Top Glove and Supermax last year to become the second largest glove maker by market capitalisation. It also registered the highest earnings growth in its latest quarter.

The main task for Kossan’s Lim, who has a 51% stake in the company, is to ensure earnings are sustainable. “We are playing good catch-up [in terms of market cap and earnings], but we cannot be complacent. We need to work harder and grow further.”

Its existing production facilities, which have a capacity of 22 billion pieces of gloves annually, are running at an utilisation rate of 80% to 85%.

Lim says RM600 million has been allocated for capital expenditure over the next six years and the company aims to double annual production capacity to 44 billion pieces by 2020. The capex of RM100 million a year is mainly for buying machinery and constructing buildings.

Kossan has spent RM120 million to secure about 85 acres of industrial land in the Klang Valley — 57 acres in Batang Berjuntai, Selangor, and 28 acres in Jalan Meru, Klang. Both parcels are ready to be developed and are sufficient to support Kossan’s expansion plans for another five years.

Going forward, the glove industry is not just about capacity expansion as automation and technology will also play a vital role, says Lim.

“For us, the priority is to put up a modern plant to overcome all the future challenges. Our industry is coming to a stage that we need to work on technology to grow. It is no longer a good idea to depend on low labour cost,” he says.

Kossan’s net profit increased 23% to RM45.45 million in the first quarter ended March 31, 2015, up from RM36.83 million a year before, thanks to higher revenue from the latex glove and clean room divisions. Revenue grew 21% to RM369.26 million, from RM306.18 million a year ago.

Lim says he expects stronger performance in the second half of this year. Kossan is targeting double-digit revenue and profit growth for the financial year ending Dec 31, 2015. Last year, the group generated net profit of RM145 million, on revenue of RM1.29 billion.

“As long as the world market is still growing and there is nothing to replace gloves, then we have nothing to worry about. That’s the beauty of the glove industry,” Lim says.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

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