PETALING JAYA: Kossan Rubber Industries Bhd, which posted a more than eight-fold surge in net profit in the second quarter (Q2), is in a good position to ride out the competition with its planned capacity expansion over the next two years.
The glove maker’s planned capacity expansion includes phase one of its Meru, Klang, plant being slated to produce two billion pieces per annum, phase two of the plant being designated for a production capacity of three billion pieces per annum and its Bidor, Perak, plant with four billion pieces capacity.
Phase one of the Meru plant will begin production in the second half of the year, while phase two is expected to start production in the first half of next year and the Bidor plant by the second half of 2022.
UOB Kay Hian (UOBKH) said upon completion, these expansions would boost Kossan’s production capacity to 42.4 billion pieces from 32 billion, or 33% over the next two years.
“While the expansion is largely in line with industry growth, Kossan is due to trail its big four peers that are anticipated to grow by 54%. We are also acutely aware that expansion targets could be scaled back or deferred should the demand-supply balance be achieved sooner-than-expected,” the research house said.
UOBKH, which is maintaining a “hold” call on the stock with a target price of RM3.15, said, however, key downside risks include softer-than-expected average selling price (ASP) revisions, delays in expansion plans, the US dollar depreciating markedly against the ringgit and a sudden spike in cost.
Kossan is among Malaysia’s largest glove manufacturers. It produces medical gloves, cleanroom gloves and industrial rubber products.
The company’s net profit for Q2 ended June 30 increased to RM1.06bil from RM131.06mil in the same quarter last year, boosted mainly by stronger demand for its gloves and a higher glove ASP. The glove maker announced a second interim dividend of 12 sen per share.
Revenue in the three-month period leapt by more than three-fold to RM2.24bil, as compared to RM701.68mil previously.
The research house said Kossan’s Q2 earnings were within expectations. The quarter signified peak quarterly earnings as ASPs started their downtrend. Meanwhile, it said volume output would likely be weighed over the near term following lockdown measures.