By Khairul Khalid
Kossan’s focus on the high-tech, high-margins synthetic glove market is paying off. Global demand is estimated at 32 billion pieces yearly and the glove manufacturer is poised to become a major player.
Business model: Kossan Rubber Industries Bhd was established in 1979. Its earliest product range was cutless bearings that were used in the marine industry. It was one of the first companies in Malaysia to venture into glove manufacturing and began its first glove production line in August 1988. Kossan was listed on the Main Board of Bursa Malaysia in 1996.
Kossan is now one of the world’s largest manufacturers for industrial rubber products and disposable latex gloves, two of its core business segments.
Malaysia’s four biggest glove makers’ combined output accounts for close to half the world’s supply. Kossan manufactures premium powder-free medical gloves for the healthcare industry. It now manufactures an estimated 22 billion pieces of gloves per annum.
Kossan also specialises in manufacturing high-technical input rubber products for wide range of application including automotive, marine, construction, infrastructure and many more.
It now has a business network that extends to more than 100 countries around the world, including the US, Canada, Europe, Asia Pacific, Latin America, Middle East and Australia.
On Nov 19, Kossan posted pre-tax profit of RM70.8 million for the third quarter of financial year 2015 (3Q15), up 56% year-on-year. Revenue for 3Q15 also increased 34% year-on-year to RM441.7 million.
Shareholders and management: Kossan can be considered a family-run company led by managing director and chief executive officer Lim Kuang Sia.
The Lim family collectively controls a 51% majority stake in the company. According to a TA Securities report dated Nov 20, major shareholders include Kossan Holdings Sdn Bhd (51.1%), the Employees Provident Fund (8.4%), Investco Ltd (5.9%) and civil servant pension fund Retirement Fund Inc or KWAP (5.6%). Around 30% of Kossan’s shares are free float.
Currently, Kossan has a market capitalisation of approximately RM5.6 billion.
Share performance:
What analysts think: In a report dated Nov 20, AmResearch downgraded Kossan due to its limited upside potential, despite its favourable exposure to the US dollar.
“We opine that further upside from its favourable US dollar exposure, which in part spurred the surge in rubber glove stocks (including Kossan), may be limited moving forward as the exchange rate appears to have stabilised,” said AmResearch in a report.
The report also explained that Kossan’s share price has already incorporated its strong earnings growth momentum, which has seen a three-year compounded annual growth rate of 22% so far.
“Our downgrade is mainly due to its rich valuations and the limited upside potential to our fair value (+6%) post its strong share price performance this year,” said AmResearch.
According to the report, Kossan’s share price has doubled year to date.
“The stock’s rally was in tandem with its peers’ average year-to-date increase of +78%. In comparison, the Kuala Lumpur Composite Index had declined by 5.8% over the same period,” said AmResearch.
Nevertheless, AmResearch expects Kossan’s earnings growth momentum to remain intact in the next quarter (4Q15) and to carry through the next financial year 2016 as the company’s new capacities progressively come on stream and its older lines are overhauled.
MIDF, in a report Nov 20, also said that Kossan’s revenue growth for 3Q15 was slightly offset by lower average selling prices of gloves which had decreased by approximately -12% quarter-on-quarter due to lower natural rubber and nitrile butadiene rubber prices.
On the other hand, the production mix of Kossan has also improved with more focus on nitrile gloves.
“The production mix of nitrile-to-latex in the first nine months of 2015 (9M15) is 68:32. In comparison, 9M14 nitrile-to-latex mix was 60:40. The increase in earnings was mainly due to better operating efficiency. Its profit margins also improved, expanding by +2 percentage points year-over-year,” said MIDF.
MIDF also added that both of Kossan’s new plants (Plant 2 and Plant 3) are up and running and have started to contribute to the group’s revenue since June 2015.
“Currently the group is operating at 22 billion pieces of gloves per annum with utilisation rate of more than 80%. By end-2015, the group expects to achieve a product mix of nitrile-to-latex gloves of 70:30,” said MIDF.
Earnings forecast:
StockStalk: There are two key factors for investors to look out for in Kossan’s potential growth.
First, it is now capitalising on the weaker ringgit and stronger US dollar, as are the other major glove manufacturers.
According to UOB Kay Hian, in a report dated Nov 20, “the stronger average year-to-date rate of RM3.85 per US dollar (2014: RM3.27 per US dollar) should help alleviate any risk of near-term margin compression in the nitrile glove segment.”
UOB Kay Hian also suggested that Kossan’s 2015 to 2017 earnings could rise 5% to 6% for every 1% increase in the US dollar against the ringgit.
Second, Kossan’s decision to focus on producing more synthetic or ultra-light nitrile gloves (rather than latex), where it has the edge over some of its rivals, is paying off handsomely.
Nitrile gloves are puncture resistant, frictionless and have a longer shelf life compared to latex gloves. Nitrile gloves are used for both medical and non-medical applications.
More importantly, from an investor’s point of view, nitrile gloves command a higher margin than regular latex gloves. Kossan has one of the highest profit margins among the “Big Four” glove manufacturers.
In recent years, export volumes of the higher-margin synthetic rubber have outpaced that of natural rubber (56:44 in first quarter of calendar year 2015), due to the increasing popularity and demand for the former in the US and the European Union region.
It is expected that by 2017, supply for synthetic rubber gloves from key manufacturers will hit 31.1 billion pieces per annum, while its demand is projected to grow at 15% amounting to 32.3 billion pieces per annum between 2015 and 2017.
Some analysts feel that there are limited upsides to Kossan’s current share price. The company could also be exposed to a glut in the market due to aggressive expansion by all major glove players.
Nevertheless, considering the two factors of the rising US dollar and increasing demand for synthetic gloves – combined with Kossan’s strong growth projections – the company can still seen as good long-term buy.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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