A CUT in its FY2022-FY2024F earnings forecast by 10%-17% to reflect margin erosion as well as deferment of expansion plan has prompted PublicInvest Research to slash Kossan Rubber Industries Bhd’ target price to RM1.23 (from RM1.40 previously).
While reiterating its “neutral” call on the Big-Four glove maker, the research house expects Kossan’s low utilisation rate of circa 60% currently to linger on amid margin erosion stemming from:
- Lack of economies of scale as utilisation rate is expected to drop to circa 50%;
- Gas cost increase in 2H FY2022 due to surge in fuel price in 1H FY2022; and
- Downward pressure on average selling prices (ASP) due to oversupply condition.
“However, we note that Kossan is currently sitting on huge cash reserves of RM2.2 bil as of 1H FY2022 which is equivalent to 87 sen/share,” observed PublicInvest Research in a company update.
“Although the management intends to maintain its regular dividend pay-out ratio at 30%, we believe there is still room for special dividend. Given the delay in capacity expansion while its automation and transformation plan is not likely to cost more than RM100 mil a year, Kossan has sufficient reserves to reward its shareholders.”
Moving forward, the research house expects raw material prices to trend downward in 2H FY2022 which could partially cushion the adverse effect faced by Kossan whose current annual capacity stands at 33.5 billion pieces.
“We understand that Kossan has placed its near-term expansion plan on hold amid oversupply issue as well as high construction costs due to high steel prices,” noted PublicInvest Research.
On the hindsight, labour shortage remains an ongoing issue for most manufacturing companies while the rising minimum wages should further elevate manpower cost, according to PublicInvest Research.
“However, Kossan’s effort to continuously develop automated production lines could help to reduce its reliance on manual labour, improve efficiency and productivity as well as quality of its products,” justified the research house.
“Hence, as Kossan achieves greater automation, we expect to see a gradual improvement in operational efficiency which should lead to lower cost.”
At 9.47am, Kossan was up 4 sen or 3.17% to RM1.30 with 1.27 million shares traded, thus valuing the company at RM3.32 bil. – Aug 4, 2022
