KUALA LUMPUR: CIMB Equities Research expects glove maker Kossan Rubber Industries Bhd
to record stronger quarters ahead, with full contribution from Plants 16 and 17 (1.5 billion pieces per annum capacity) which were fully commissioned in August and November, respectively.
It said on Thursday Kossan’s glove production capacity should further expand to 32 billion pieces per annum (up 20.7%) by end-2019F from 26.5 billion at end-2018 through the full commissioning of Plant 18 (2.5 billion pieces per annum) by 2Q19F and Plant 19 (three billion pieces per annum) by 4Q19F.
Kossan's 3Q18 revenue and net profit rose on-quarter, by 15.5% and 24.6% respectively. The stronger 3Q18 performance, due to higher production volume in tandem with full commercialisation of Plant 16 (three billion pieces per annum capacity) in Aug 2018, brought 9M18 net profit to RM141mil (2.6% on-year), within expectations.
CIMB Research said after the completion of Plant 19 by end-2019F, Kossan plans to start developing its 824-acre land in Bidor, Perak with a total capex of RM1.5 bil.
It aims to build an integrated manufacturing hub, which will host 12 glove plants (each: four billion pieces per annum capacity) with plans to construct three plants biennially.
“Also, it plans to construct factories in the area for value-adding strategic suppliers. We understand that all necessary utilities are in place, and the land also has excellent connectivity and sufficient labour from the surrounding areas.
“We view Kossan as a laggard play, given that it is currently trading at a 21.9 times CY19F P/E, near its five-year historical mean of 22 times. However, this is at a 25% discount to the glove sector’s average P/E of 29.4 times.
“Historically, Kossan had traded at a premium of 3% vs. the glove sector (based on five-year average P/E). In comparison, Hartalega is currently trading at 37 times P/E (higher than 1.5 standard deviation of its five-year mean) while Supermax is trading at 16 times (above its five-year historical mean of 15.7 times),” it said.
CIMB Research makes no changes to its EPS estimates, Add call and TP of RM5.16 (22 times CY20F P/E, five-year historical mean).
With concerns over delays of its expansion plans allayed, the research house believes its capacity growth plans and robust earnings growth (three-year EPS CAGR of 16.7% over FY17-20F) provide a strong base for a share price re-rating.