Weakening of ringgit has no direct impact on operations as its prices depend on exchange rates and raw material costs
KOSSAN Rubber Industries Bhd founder Datuk Lim Kuang Sia says the weakening of the ringgit has no direct impact on rubber gloves manufacturers although they derive their profits in US dollars.
“There is advantages when the ringgit weakens but it’s very small because we quote our product prices twice a month. This also applies to changes in raw material prices,” he tells StarBizWeek.
He says the glover makers have done fairly well even when the ringgit was pegged at RM3.80 against the US dollar and when raw material prices were high.
“At the time when the ringgit was pegged against the US dollar, many thought that the glove industry is going to get into trouble because the ringgit is going to get stronger, but we were still doing alright.
“This is because we quote our prices every two to three months and the price will depend on the exchange rates and raw material prices,” he says.
Lim, who is managing director and chief executive officer of Kossan, says the lower net margins the company reported in the second quarter of 2016 compared to a year ago was mainly because of price pressure for glove products.
“It’s not because of oversupply in the market that is causing price pressure. It’s price war for certain type of glove products in the market that is also impacting our prices,” he says.
For the second quarter ended June 30, Kossan reported a 13.4% drop in net profit to RM40.97mil from RM47.4mil a year ago, on the back of higher sales of RM403.8mil during the quarter compared with RM385.8mil previously.
This brings its net margin to 10.2% in the second quarter compared with a net margin of 12% last year.
Lim expects price pressure to continue in the second half of this year as the manufacturing industry as a whole will be impacted by higher production cost, especially with the recent increase in minimum wage.
In July, the Government increased the monthly minimum wage in the private sector from RM900 to RM1,000 for Peninsular Malaysia.
“The increase is not a big deal because the industry will be able to adjust by itself.
“It is important for manufacturers to keep improving their efficiency. I can’t be using the same technology that I used in my factory 20 years ago,” Lim says.
For Kossan, Lim says the company’s focus now is not only on the automation of its factory but also on research and development (R&D).
It has allocated RM100mil for the next five years to expand production lines, for plant automation and R&D.
Lim reckons that product innovation and automation of plants to improve production processes will help to sustain the company’s profit margin, moving forward.
The company has so far invested about RM35mil in its R&D centre, which is targeted to be completed by July next year.
Currently, Kossan has an installed capacity of 22 billion gloves per year and the company expects to add 3 billion gloves in capacity next year with the completion of its new plant.
“The plant was supposed to be completed this year but due to the water issue in Selangor, the deadline has been held back,” Lim says.
On Thursday, Kossan launched its first patented technology for synthetic glove products that will help users from developing allergies from latex protein and rubber chemical accelerators.
Lim says Kossan is the first Malaysian glove manufacturer to be granted the “Low Dermatitis Potential” claim by the US Food and Drug Administration (FDA).
The patent granted by FDA will last for 20 years, he says.
The company had also been granted with patents in Japan, China, Hong Kong and Taiwan.
“The launch of Low Derma Technology would be the starting point of the company to focus in R&D and we aim to introduce more products in the future,” Lim says.
He adds that Kossan has invested RM2mil for the product development of Low Derma Technology and that the patent was applied in 2009.
Kenanga Research reckons that the new product innovation by Kossan would be a popular choice in developed countries.
“We believe the group will charge a slight 2%-5% premium on its average selling price (ASP) for Low Derma Technology, as it provides a better and safer alternative to the products available in the market today,” it says in a report.
However, the research house maintains its earnings estimates for Kossan because it has already imputed the better margins from Low Derma Technology product.
“Although we like Kossan for its diversified product offering and emphasis on product innovation, its earnings outlook remains muted, given industry-wide pricing pressures and less favourable operating environment,” it says.
Yesterday, shares in Kossan closed 3% higher to RM6.62. On a year-to-date basis, Kossan’s shares has declined 28%.
The counter is currently trading at a historical price-earnings (PE) ratio of 20.7 times of financial year 2015, which is among the highest compared to the other three glove manufacturers listed on Bursa Malaysia.
Top Glove Corp Bhd, which is the biggest glove maker in the world, is currently trading at PE of 2.19 times, while Supermax Corp Bhd and Hartalega Holdings Bhd at 14.06 times and 29.39 times, respectively.
Despite the valuation, Kossan has 10 “buy” calls out of 18 research houses tracked byBloomberg.
