KUALA LUMPUR: Affin Hwang Capital Research has upgraded Kossan Rubber Industries Bhd
to a buy call despite lowering its earnings forecast due to slower-than-expected plant expansion.
It said the capacity delays had already been priced into the counter's share price and management is confident the current setback will soon be resolved.
The research house added that Kossan is targeting for Plant 16 to operate at full capacity by July this year.
It also expects delays to the completion of Plants 17 and 18 to be limited as subsequent expansions are based on Plant 16.
"Although Kossan has missed our initial schedule, management has guided that they are still on track to achieve 47.5bn pieces/year by 2023, starting with completion of Plant 17 by end-2018, followed by Plant 18 by mid next year."
Affin Hwang expects earnings growth for Kossan in 1H18 to be flat as operating levels are already above the 85% utilisation rate.
However, the new capacity from Plant 16 is expected to be taken up as demand growth outstrips capacity growth due to conversion from vinyl gloves to other alternatives like latex or nitrile gloves.
"As such, we believe that earnings growth at a low-mid (high) teens level for the next 3-years is sustainable."
Affin Hwang maintained its target price for Kossan at RM8.40 based on an unchanged 22x price-earnings now applied to its 2019E earnings per share
"We believe valuation is undemanding and prices in the capacity delays. However, our preferred sector picks remain Supermax (SUCB MK, RM2.90, BUY) (valuation) and Top Glove (TOPG MK, RM9.80, BUY) (earnings surprises)."
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