We are positive on Kossan’s earnings prospect, underpinned by take-ups for its Plant 16, 17, 18 and margins improvement from better operational efficiencies. We like Kossan because it is trading at a 25% discount to peers’ PER average despite its net profit growth is the highest circa. 23.7% against to peers average at 7%. BUY with a TP of RM5.25 based on 25.5x FY20E EPS.

Tell-tale signs of pent-up demand for nitrile gloves potentially on re-stocking activities are pointing towards a better quarter in 3QFY19. We expect its core 3QFY19 PATAMI, which results are due to be released by end-Nov 2019, to be higher QoQ and YoY due to: (i) new capacity expansion from plant 18, (ii) overall production back to normalcy following the completion of maintenance works across the Group’s plants, and (iii) better margins due to higher operating efficiencies from new plants.

We expect gradual margins expansion from the fullycompleted Plant 16, Plant 17 and eventual completion of Plant 18 and 19 by 2019. This is simply because the new plants are designed to save on heating and electricity cost via the use of computerised control system and efficient usage of a single boiler instead of two as in the older plants.

Looking ahead, Plant 16 and Plant 17 are expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018 and end 2018. Plant 18 (2.5bn pieces) has commenced operations with six lines. Plant 19 (3.0bn pieces) are currently on track, with expected full commissioning latest by 1H 2020.

Upon completion, these three new plants will add an additional 7bn pieces of gloves per annum, bringing the group’s total installed capacity to 32bn (+28%) pieces of gloves per annum. The Group expects construction of the Bidor plant to take eight years to complete, costing RM1.5bn (works out to RM190m capex per annum) for an integrated glove manufacturing project, subject to all relevant approvals being obtained. The expected capacity at the Bidor plant is estimated at 34bn pieces per annum, which will more than double from 32bn pieces currently (once Plant 18 and Plant 19 are fully commissioned).

Source: Rakuten Research - 13 Nov 2019