KOSSAN (7153) - Kossan Rubber - Unveiling The Expansion Plan

We attended Kossan’s briefing last Friday where management shared positive progressions on their next 5 years expansion plan. The Group will ramp up its current capacity by an additional 22.5bn pcs by building 10 plants over 5 phases on 57 acres of landbank in Batang Berjuntai by 2021. Based on their track record of prudent expansion initiatives, that has been positively captured in their growing margins, we are excited on 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 DDM approach, to account for the new capacity that will come onstream FY17 onwards.

Expansion schedule. To fulfill strong demand for nitrile gloves, Kossan plans to double its current 22.5bn pcs capacity by 2021. The expansion plan will be executed in 5 phases from end-2015 onwards, with a construction period of 18-20 months following another 1 to 2 months trial run prior to full commercialising of a line. Earth works for Phase 1 has begun with construction of its supporting facilities thereafter with completion expected 2HFY17. Total capex for the expansion is estimated to be RM600m or c.RM150m/year.
   
Improve product mix. To recap, the group also produces medical and special purpose gloves, such as surgical, clean-room, food grade, high risk, sterilized, dental and industrial gloves. Special purpose gloves currently represent c.15% of total capacity with the target to achieve 30% within the next 1 to 2 years will contribute to its margin enhancements going forward. Meanwhile, the group will continue to focus on light weight nitrile gloves and aim to achieve a product mix of 80:20 - nitrile (SR) and natural rubber latex (NR) in FY16 respectively (YTD - 68:32 SR vs. NR). We are reassured of Kossan’s performance, as their additional 6bn pcs capacity have been fully sold out, translating to an average utilization rate of c.80%-85% with line speed between 40,000pcs-42,000pcs/hr.
   
Sustainable margins. R&D is continuously carried out to improve efficiencies, productivity and to minimise reject rate. The group has moreover allocated capex for upgrading its old production lines and additional capacity in FY16 and FY17. Kossan’s continuous automation efforts have also reduced its headcount to 2.9 workers per million gloves per month with the aim to reduce this further to 2.2 workers per million gloves per month.

Source: PublicInvest Research - 23 Nov 2015

KOSSAN (7153) - Kossan Rubber - Unveiling The Expansion Plan