We visited Kossan‟s new plants, 1 in Meru, Klang which has been commissioned since end-April, and 2 upcoming plants in Kapar to commission in 2HFY14. All the plants will produce 3g nitrile gloves at line speed range from 40,000 pcs/hr to 43,000 pcs/hr. We were impressed with the new design of the lines, coupled with the advancement of the technology and concede that Kossan has remained a strong player, as it prioritised its focus on the efficiency and technological aspects ahead of its capacity expansion. Kossan‟s strategy has led its performance to grow its margins (12% from 10% YoY) while increasing capacity, amidst a crucial time for players who are experiencing the margin compressions.

Gloves (FY13 PBT – 90%). Kossan‟s 2014 capacity expansion plans will be achieved by 17 new lines of double former design, installed in 3 plants. The installation and commissioning will be completed by end 2014, but as 2 plants will only come on-stream in September and October, full contributions from the 3 plants will only be fully recognised in FY15 onwards. The new capacity of some 1.5bn pcs gloves from Plant 1 and partial Plant 2 should support the Group‟s ability to delivery double-digit growth for FY14. Going forward, the new installed capacity we assume would provide earnings visibility for Kossan at least the next 2 to 3 years.

Strength in Product (mix). Demand is largely driven by its sustainable client base buoyed by its wide range of glove types offering, with the ability to cater for its various clients needs. To recap, the Group produces cleanroom, food grade, high risk glove and other thick versions of NR gloves for specific applications. We thus expect stable yet compelling margins as “special purpose” gloves can command higher margins coupled with less players focusing on this segment. The Group‟s product mix currently consists of 56% nitrile (SR) and 44% natural rubber latex (NR), with the aim to target a 65% SR and 35% NR ratio production in 2014. We are moreover reassured of Kossan‟s performance, as they have confirmed full capacity orders for 2HFY14, translating to a utilisation capacity of c.85% of the total plant‟s production.

Potentially higher dividends. With continued earnings accretion and considering last year‟s payout to be c.36%. We are estimating that the Group will continue this payout trend going forward with potentially a higher commitment to its payout, in tandem with its positive growth performance.

Maintain Outperform, considering Kossan‟s ability to grow its margins and with further upside expected from the improving contributions from the product mix, technological enhancements and ongoing efficiency initiatives. We are however adjusting our revenue and earnings estimates by -10% and -13% respectively to account for the 2014 new capacity‟s full realisation only in FY15. Our DDM-derived TP of RM5.12 remains unchanged nonetheless in anticipation of Kossan to continue increasing its dividend payout.

Source: PublicInvest Research - 4 Jul 2014