We came away from our recent meeting with management feeling more optimistic on Kossan’s (KRI) outlook. We lift our FY14 estimate by 4.7% to  reflect  the  group’s  improved  production  efficiency  and  stronger contributions  from  its  higher-margin  products.  Maintain  BUY,  with  our FV  moved  higher  to  MYR4.52  (from  MYR4.13),  in  view  of  KRI’s healthy capacity expansion plans. 

Expansion  to  boost  earnings.  KRI  recently  acquired  a  9.26-acre  land parcel  in  Klang,  Selangor  earmarked  for  capacity  expansion.  Once  the acquisition is completed by 1QFY14, it plans to build 20 new production lines by end-2014. This will lift its total installed production capacity by 5-6bn  pieces  annually  to  27bn  pieces  (ongoing  expansion  will  boost capacity  to  22bn  pieces  by  May  2014).  We  believe  this  would  bolster KRI’s production and earnings moving  forward  as  it  targets  for  the  new lines to be commissioned latest by 1HFY15.   

Expanding  TRP  segment. We  gather  that  KRI  is  looking  to  expand  its technical  rubber  product  (TRP)  division  in  Indonesia  –  it  plans  to  begin construction  of  its  new  plant  there  by  1HFY14.  We  are  upbeat  on  the prospects  of  its  TRP  division  given  lower  production  costs  and  the favourable  operating  environment.  As  of  9MFY13,  its  TRP  division 
chalked  up  positive  sales  growth  of  8.2%  y-o-y,  with  sales  of  its cleanroom gloves soaring >100% y-o-y.   

Lifting  FY14  estimate.  Our  FY13  estimates  are  unchanged.  However we  raise  our  FY14  net  profit  estimate  by  4.7%  after  raising  FY14  EBIT margin to 14% (from 13.4%) to reflect the group’s enhanced production efficiency and greater contributions from higher-margin products such as cleanroom  gloves  and  TRP.  We  also  take  the  opportunity  to  introduce our FY15 estimates.  

Maintain  BUY.  We  continue  to  like  KRI  given  its:  i)  strong  earnings visibility from its planned capacity expansion over the next two years, ii) balanced product mix (53% nitrile and 47% natural rubber), which allows it to tap into both market segments. We maintain our BUY call, but raise our  FV  to  MYR4.52  (from  MYR4.13)  in view of KRI’s healthy capacity expansion  plans.  Our  new  FV  is  pegged  to  a  higher  16x  (from  15.3x) FY14 EPS, which is in line with the sector’s average weighted FY14 P/E of 16.4x.

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Company Profile

Kossan Rubber Industries’ principal activities are in the manufacture of examination rubber gloves and technical rubber products.

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Source: RHB