Kossan Rubber Industries Bhd
(Aug 6, RM7.33)
Maintain buy with higher target price of RM7.90 from RM6.71. Kossan is likely to report a robust set of numbers in the coming quarters due to the group’s aggressive expansion plans as well as the favourable operating environment. We believe that the group’s healthy expansion strategy over the next five years should buoy earnings growth in the foreseeable future. Thus we raise our 2015-17 earnings per share (EPS) forecasts by 5% to 11%.

Kossan is set to release its second quarter 2015 (2Q15) results on Aug 20. We believe its core earnings will be significantly higher year-on-year as the group continues to reap the benefits of higher production capacity and the favourable operating environment.

We also expect the group to experience margin expansion as it reaps economies of scale from the addition of new production lines.

Meanwhile, we believe that the group will clock in stellar results in the second half of 2015 (2H15), given that its production capacity has increased by four billion pieces of gloves from two of its newly-built plants (which began commercial production in June).

We understand the new capacity has already been fully taken up by existing and new customers.

This will contribute to the group’s margin enhancement in the next few quarters as nitrile contributions start to increase together with the improved cost efficiencies from its newer plants.

Management has also revealed its five-year plan which includes the doubling of its total production capacity to an estimated 44 billion pieces per annum in five stages.

We understand two plants will be added for each phase and the project will be constructed on its 85-acre (34.39ha) piece of industrial land.

Nonetheless, the group has also indicated that it will only expand once it secures orders for the incoming capacity. We are forecasting the group’s capex to total RM100 million to RM120 million a year (including the revamping of older lines). We continue to like Kossan for its strong earnings growth profile (three-year compound annual growth rate of 26.3%). — Affin Hwang Capital, Aug 6

This article first appeared in digitaledge Daily, on August 7, 2015.