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Tuesday, December 4, 2018

Kossan Rubber Industries - A Sturdy New Plant, Margins To Improve

Author: kiasutrader | Publish date: Tue, 4 Dec 2018, 08:50 AM

We recently attended a plant visit to Kossan Rubber Industries (Kossan) Plant 16 together with a group of sell-side analysts. We came away from the meeting feeling positive on the takeup rate for its Plant 16 and Plant 17 and expect margins to improve going forward. Our TP is RM4.95 based on 25.5x FY19E EPS (+1.5 SD above 5-year historical forward mean). We like Kossan for its strong YoY earnings growth in subsequent quarters. Maintain OP.

A spanking-new Plant 16, automated packing system to be ready in 2019. Kossan has invested in automation and computerisation of its manufacturing processes and gradually reduced its reliance on manual workers to minimise the adverse effect of the minimum wage policy as well as making some system enhancements, which are expected to result in cost savings. Some of the automations put in place include: (i) automated mechanical stripping system (removing gloves off hand moulds), and (iii) glove puller and stacker system. To complete the entire automation process, the automated robotic packing system is expected to go live around end 2H19.

Expect gradual margins expansion. We expect gradual margins expansion from fully completed Plant 16, Plant 17 and expected completion of Plant 18 and 19 to be commercially ready by 2019. This is simply because the new plant is designed to save heating and electricity cost via the use of computerised control systems and efficient usage of a single boiler instead of two as in the older plants. Additionally, the introduction of robotic packing system would lead to two-third lesser manpower requirements at the packing division. The older plants could see stable margins emanating from lower downtime due to their focus on larger orders for single product type and specification, thus reducing idle downtime from frequent machinery setting adjustments to accommodate diverse specifications.

Building glove plants in Bidor starting from 2019. The next phase of expansion programme will be focused on Bidor, Perak, which is intended to accommodate the group’s expansion in a centralised location (i.e. an integrated glove manufacturing facility) over the medium and longer term. The Group expects construction, which will start in 2019, to take eight (8) years to complete, costing RM1.5b (works out to RM190m capex) for an integrated glove manufacturing project in Bidor, subject to all relevant approvals being obtained. The expected capacity at the Bidor plant is estimated at 34bn pieces per annum, which will more than double from 32b pieces currently (once Plant 18 and Plant 19 are fully commissioned).

Plant 16,17,18 and 19 to boost earnings over next two years. Looking ahead, Plant 16 is expected to anchor subsequent quarters’ earnings, which was fully commissioned in Aug 2018. It has an installed capacity of 3b pieces per annum and will focus on the Group’s patented Low Derma Technology gloves. The group has started commercial production of Plant 17 (1.5b pieces) in Nov 2018. Construction works for Plant 18 (2.5bn pieces) and Plant 19 (3.0bn pieces) are currently on- track, with expected full commissioning by 2Q 2019 and 4Q 2019, respectively. Upon completion, these three new plants will add additional 7b pieces of gloves per annum, bringing the group’s total installed capacity to 35bn (+25%) pieces of gloves per annum by end- FY19.

Maintain Outperform. We maintain our FY18E/FY19E earnings forecast. Our TP is RM4.95 based on 25.5x FY19E EPS (+1.5 SD above 5-year historical forward mean). Key risk to our call is slower- than-expected commissioning of the new plants.

Source: Kenanga Research - 04 Dec 2018

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