KOSSAN Rubber Industries Bhd has at time of writing overtaken Top Glove Corp Bhd as the second priciest Big-Four glove stock behind Hartalega Holdings Bhd with Supermax Corp Bhd coming in at the fourth spot.
PublicInvest Research, which recently met up with the glove maker’s management, felt positive of the company’s long-term prospects, driven by its (i) automation and digitalisation initiatives; (ii) environmental, social and governance (ESG) initiatives; and (iii) solid long term relationship with its customers.
This is despite in the near term, the research house remains wary of the impact of margin compression while the Russia-Ukraine conflict may worsen the condition of supply chain constraint.
“The management has also guided that cukai makmur (windfall tax) is not expected to hit Kossan as the individual entities are not expected to exceed the RM100 mil threshold following which we revise our FY2022F earnings by +13% after removing the effect of cukai makmur,” PublicInvest Research pointed out in a company update.
‘We maintain our ‘neutral’ call on Kossan with a target price of RM1.73 pegged to a price-to-earnings (PE) ratio multiple of 17 times on CY2023F earnings per share (EPS) of 10.1 sen/ share.”
Elaborating on margin compression, the research house foresees gas prices rising by 13%-14% in 2H FY2022 following the recent surge in fuel prices.
“With investors paying greater attention to ESG, the management is taking the initiatives to become more ESG-compliant which should lead to higher ESG-related cost in the future,” projected PublicInvest Research.
“Couple with a falling average selling price (ASP) though at a slower rate of decline, we expect further margin erosion in the coming quarters.”
Having said that, the research house expects Kossan to be able to negotiate for better pricing given its strong business relationship with its customers. During the pandemic, Kossan has restrained from raising its ASP drastically to allow its customers to better manage their working capital needs.
“Although we expect oversupply condition to persist, we believe Kossan would be least impacted due to its conservative expansion plan,” noted PublicInvest research.
“The expansion in Meru land with 15 lines and annual production capacity of five billion pieces is targeted to complete sometime mid-FY2023F which was originally plan to be completed in FY2022.”
In the long-term, the research house expect the demand for gloves to stay above the pre-COVID level due to the growing awareness for hygiene following the global outbreak of COVID-19.
Moreover, Kossan is targeting Far East countries where the growth potential is expected to be stronger due to lower per capita consumption (for example Japan’s glove consumption is only 106 pieces compared to the US’s 250 pieces).
At 12.25pm, Kossan was up 5 sen or 2.66% at RM1.93 with 2.13 million shares traded, thus valuing the company at RM4.94 bil. Top Glove was up 7 sen or 3.78% to RM1.92 with 11.35 million shares traded, this giving the glove maker a market capitalisation of RM15.76 bil. – March 30, 2022
