Kosssan earnings to grow on higher volume sales, ASP

  • Analyst Reports
  • Wednesday, 15 Apr 2020

KUALA LUMPUR: Higher volume sales and an average selling price has put Kossan Rubber Industries Bhd on track to a solid earnings performance in FY20 after three quarters of weak growth.

According to Kenanga research, Kossan is poised to benefit from the high demand that has led to longer delivery lead times in the industry, which has risen to between 80 to 100 days as compared to 40 to 50 days in normal times.

For 2020, the Malaysian Rubber Glove Manufacturers Association has forecast a 20% demand growth to 230 billion pieces.

Kossan is also looking at margins expansion as signs of demand outstripping supply could lead to higher average selling prices.

"We understand that Kossan has raised prices by 3-5% in anticipation of higher demand and we also noted the industry current high >90% utilisation rate for nitrile-centric players which is a stark contrast compared to the lacklustre demand in 2019," said Kenanga is its note.

For the first quarter of 2020, Kenanga is expecting Kossan's 1QFY20 Patami to be higher due to new capacity expansion from plants 18 and 19, and better margins from higher operating efficiencies from the new plants.

Under a scenario where there is full commencement of plant 18 and partial commencement of plan 19, and assuming a net margin of 10% and an average selling price of 9.5 sen a piece, Patami in 1QFY20 could come in at RM66mil to RM68mil, which would meet Kenanga's and consensus full-year forecasts.

Upon completion of plants 17, 18 and 19, the group's total installed capacity is expected to grow 28% to 32 billion pieces of gloves per annum.

Kossan is also looking at agressive capacity expansion, with the first Bidor plant expected to start commercial operations in 2021.

Kenanga has kept its outperform call on Kossan with a higher target price of RM.630 from RM5.90 previously.
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