Why Kossan Is A “Buy” For Research Houses Kossan Rubber Industries specialises in the production of various rubber and latex products, especially as used in the health care industries, dentistry, and research. Kossan also produces specialised rubber parts and components for various industries, including the automotive industry. Kossan is in a good position to enjoy growth and should see solid financial returns. Importantly, declining demand for latex and rising global raw material supplies have been causing raw material prices to drop in recent months, which should generate substantial windfalls for companies such as Kossan. Meanwhile, increased spending on health care across Southeast Asia should lead to increased demand for latex gloves. Rubber and synthetic gloves are widely used in hospitals, dentist offices, and similar businesses. Asia is actually the fastest growing market for latex gloves in the world, though the United States is still the world’s largest consumer. Healthcare spending has been rapidly expanding in South East Asia. Between 1998 and 2010, spending grew 2.5 times . With poorer countries, such as Cambodia and the Philippines, looking to expand access to health care coverage, demand for rubber gloves should grow. Demand for synthetic (nitrile) and powder free gloves should be an especially strong point of growth, especially in Asian markets. Up until recently, gloves made from natural rubber have been the most popular for Asian hospitals and companies. Fundamental changes in the market, however, are causing demand to shift towards nitrile gloves as there is a lower risk of allergic reactions and in general said gloves are more effective. Malaysia is the world’s leading producers of rubber gloves. Kossan is considered one of the world’s four primary rubber glove producers, along with Top Glove, Supermax, and Hartalega. Malaysia has several natural advantages in producing gloves, including access to raw materials, government support, and a strong research and development sector. Besides health care, Kossan provides specialised rubber products for a variety of industries, such as automotive and infrastructure. The automobile industry has already hit record highs and is expected to grow through the near future. Some 82.8 million cars were sold in 2013 and is projected to break the 100 million mark by 2018 . Company Profile Kossan is one of the largest manufacturers of rubber gloves with a capacity of 20 billion pieces per annum and started out primarily making natural rubber gloves. It has since diversified into nitrile gloves which take up 60 percent of total capacity and power-free gloves with the remaining 40 percent. Kossan also offers a variety of products under its technical rubber division and is Malaysia’s largest manufacturer for technical rubber products with approximately 10,000 metric tonnes of rubber compound being produced. Such products include custom molded rubber products for the automotive and other manufacturing industries, including custom seals and gadgets. The company also produces engineered rubber products, such as dock fenders. Key Financial Highlights Kossan enjoyed revenue of RM1.3 billion in 2013, versus revenues of only RM1.2 billion in 2012. Even better, the company’s revenues are projected to grow to RM1.7 billion in 2014 and RM1.8 billion in 2015, according to Maybank IB Research. The company’s earnings before interests, tax, depreciation and amortisation (EBITDA) is projected to grow at similar rates. For 2014 and 2015, the company’s EBITDA is projected to grow to RM289.6 million and RM318.6 million respectively. Key Developments Kossan is completing three new plants that will increase production capacity to 6 billion pieces of nitrile gloves. More than 80 acres of industrial land located within the Klang Valley has been secured, allowing for an easy supply of natural gas and matured infrastructure. Utilisation rates of its facilities exceeded 80 percent, while maintaining 15 to 20 percent spare capacity provides better flexibility for operations. The company is targeting a product mix of 80:20 for nitrile and natural rubber gloves by FY16. For technical rubber products segment, Kossan is investing in a new Jakarta facility, which will cost between RM1.2 billion and RM1.7 billion, and produce infrastructure products. Weakening Ringgit to benefit Kossan as exports become more competitive. Brokers’ Recommendations & Catalysts Investment companies are very optimistic that Kossan will grow in the near future. Most analysts are confident that market conditions will prove favourable, and that Kossan will maintain its strong track record. AmResearch cites numerous factors for its upbeat outlook for Kossan. The company notes that Kossan is in position to enjoy a superior earnings growth of 28 percent in FY14, versus a peer average of only 11 percent. AmResearch also cites Kossan’s efforts to scale up the value chain and a favourable operating environment. The company has set its target price at RM5.05. Maybank is not as optimistic in its target price, having recently set it at RM4.50. Owing to Kossan’s long term growth potential, however, Maybank still classifies Kossan as a “Buy”. Maybank cites the company’s rapid expansion in the nitrile rubber glove sector and its high plant utilisation rate as key reasons why the company will perform well over the long run.
Posted on: Fri, 07 Mar 2014 03:31:33 +0000
Trending Topics
© 2015