This article first appeared in The Edge Financial Daily on February 25, 2020
Kossan Rubber Industries Bhd
(Feb 24, RM4.64)
Maintain outperform with an unchanged target price of RM6: Kossan Rubber Industries Bhd’s revenue for the financial year ended Dec 31, 2019 (FY19) rose 3.8% year-on-year (y-o-y) to RM2.22 billion, predominantly due to a better performance in the glove and cleanroom segments up 4% and 7.5% y-o-y respectively.
The glove division’s growth was mainly supported by a higher volume (7.8% y-o-y), despite the average selling price (ASP) declining 4% to 6% y-o-y. We believe the falling ASP was a result of declining raw material prices, as nitrile-butadiene rubber prices fell 10% to 12% y-o-y, but natural rubber prices increased 4% to 6% y-o-y.
Kossan’s FY19 earnings before interest and tax (Ebit) grew 9.6% y-o-y to RM295 million, and Ebit margins improved 0.7 percentage point y-o-y to 13.3%. We attribute the Ebit margin expansion to falling raw material prices and better operating efficiency.
The company’s Plant 18, having experienced labour issues, was fully commissioned in November 2019. Kossan’s Plant 19 — adding three billion pieces per annum — has commissioned two lines, and another two more were commissioned as at the time of writing. The Plant 19 is expected to be fully operational by the first half of financial year 2020.
Take note that Plant 19 did not experience labour shortage as Kossan has hired foreign labour from Nepal and the labour issue was resolved in November 2019. Kossan’s expansion in Bidor, Perak will be accelerated, with its first plant to complete by FY21 forecast.
Similar to other glovemakers, Kossan also saw an uptick in orders from January following the Covid-19 virus outbreak.
Although it is still too early to quantify the outbreak’s exact impact on its bottom line, we expect some impact on Kossan’s first quarter of FY20 results. While its orders from the US and European Union have been growing, the virus outbreak has led to more orders from China and Hong Kong. — PublicInvest Research, Feb 24