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Tuesday, November 24, 2015

Kossan unveils expansion plan

This article first appeared in The Edge Financial Daily, on November 24, 2015.

Kossan Rubber Industries Bhd ( Valuation: 1.10, Fundamental: 2.10)
(Nov 23, RM8.86)
Upgraded to outperform call with a higher target price (TP) of RM10.45: We attended Kossan Rubber Industries Bhd’s briefing last Friday where management shared positive progressions on its expansion plan for the next five years.

The group will ramp up its current capacity by an additional 22.5 billion pieces by building 10 plants in five phases on 57 acres (23ha) of land bank in Batang Berjuntai by 2021.

Based on its track record of prudent expansion initiatives that has been positively captured in its growing margins, we are excited with this next growth trajectory the group will embark on.

We are therefore upgrading our call to “outperform” with a higher TP of RM10.45, based on our dividend discount model approach, to account for the new capacity that will come on stream in the financial year ending Dec 31, 2017 (FY17).

To fulfil strong demand for nitrile gloves, Kossan plans to double its current 22.5 billion pieces capacity by 2021.

The expansion plan will be executed in five phases from end-2015 onwards, with a construction period of 18 to 20 months following another one to two months of trial run prior to full commercialisation of a line.

Earth works for Phase 1 have begun with the construction of its supporting facilities thereafter with completion expected in the second half of FY17.

Total capital expenditure (capex) for the expansion is estimated to be at RM600 million or about RM150 million per year.

To recap, the group also produces medical and special-purpose gloves, such as surgical, clean-room, food-grade, high-risk, sterilised, dental and industrial gloves.

Special-purpose gloves currently represent about 15% of total capacity, with a target to achieve 30% within the next one to two years to contribute to its margin enhancements going forward.

Meanwhile, the group will continue to focus on lightweight nitrile gloves and aims to achieve a product mix of 80:20 between nitrile and natural-rubber latex in FY16 respectively.

We are reassured of Kossan’s performance, as its additional six billion pieces capacity is fully sold out, translating into an average utilisation rate of 80% to 85% with a line speed of between 40,000 and 42,000 pieces per hour.

Research and development is continuously carried out to improve efficiencies, productivity and to minimise rejection rate.

The group has moreover allocated capex for upgrading its old production lines and increasing additional capacity in FY16 and FY17.

Kossan’s continuous automation efforts have also reduced its headcount to 2.9 workers per one million gloves per month, with the aim to reduce this further to 2.2 workers per one million gloves per month. — PublicInvest Research, Nov 23

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