Kossan’s management recently hosted a group of sell-side analysts at the recently commissioned Plant 16, to showcase the progress of its latest automation capability. During the visit, management also guided on the importance of automation to improve productivity (and lowering costs), and it is in the midst of resolving the bottleneck of automation (packaging). Reiterate BUY on Kossan, with an unchanged TP of RM 5.10, as we believe Kossan is back on the right track to deliver earnings growth.

Focus on Automation

Kossan (KRI) believes that the key to maintaining cost competitiveness is through automation, as it foresees higher labour and energy costs in the coming quarters. Similar to its peers, KRI has successfully automated the stripping and stacking process, but is working on the packaging process. Management believes that it will be able to integrate the automation process into its production lines by 2019. However, based on our observations, KRI will still need to work on perfecting the stacking process before it is able to integrate the packaging process.

Bidor, Perak a Game Changer for Kossan

We believe that the gains from the automation of KRI’s production lines are likely to be dwarfed by the potential gains from the proposed integrated plant in Bidor, Perak. The planned integrated plant will more than double the current capacity, post completion. We believe that the plant would be similar to Hartalega’s NGC (Next Generation Integrated Glove Manufacturing Complex), whereby cost savings were gained through usage of common facilities. Kossan will also try to recruit its suppliers to set up production facilities within its vicinity, to further enhance cost savings.

Maintain BUY With An Unchanged TP of RM 5.10

We reiterate our BUY call on Kossan with an unchanged TP of RM5.10 (based on 27x 2019E PER), as we remain optimistic on its growth outlook supported by its capacity expansion starting from the completion of Plant 16. Although the Bidor expansion will only start contributing in 2020, Kossan is moving in the right direction.

Source: Affin Hwang Research - 18 Dec 2018