KUCHING: Kossan Rubber Industries Bhd (Kossan) is targeting double-digit earnings growth over the next three to five years.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a report yesterday said the earnings growth will be contributed by increased manufacturing capacity for nitrile gloves arising from better demand.
MIDF Research noted the company currently has a product mix of 66 per cent for nitrile gloves and 34 per cent for natural rubber gloves.
It observed that the ratio is higher than its product mix in the first quarter of financial year 2014 (1QFY14) ended March 2014 of 57 per cent for nitrile gloves and 43 per cent for natural rubber gloves.
Meanwhile, the research firm believed Kossan is moving closer to achieve its targeted product mix of 80 per cent for nitrile gloves 20 per cent of natural rubber gloves by 2016. Additionally, MIDF Research also believed that Kossan will be able to achieve its target with the completion of the company’s factories, Plant 2 and Plant 3 which have just started to contribute to its sales.
The research firm noted Kossan’s new factories, Plant 4 and Plant 5, which are currently under construction are expected to be completed by financial year 2017 (FY17).
Following a briefing by Kossan’s management, MIDF Research said those two new plants will contribute an additional average of 4.5 billion pieces of gloves per annum to the glove manufacturer’s production capacity.
Furthermore, the research firm noted Kossan expects to develop an 57-acres of land bank in the Klang Valley to increase its total production capacity to 49 billion pieces of gloves per annum under its long-term plan.
MIDF Research pointed out the company’s expansion plan will be focusing on nitrile gloves production and the plan is expected to be carried out in five phases.
Initially, the research firm said Kossan will build two plants in a phase consisting of 10 production lines each. On another note, MIDF Research said Kossan expects to reduce its operating costs with more automation in the pipeline.
By focusing on automation, it noted Kossan is looking at reducing its labour costs which constitute approximately nine per cent of its total cost.
The research firm added Kossan has also placed several internal targets to optimise the usage of its utilities and to reduce wastage of chemicals without disrupting the quality of the gloves.
MIDF Research noted their strategy moving forward is to focus on expansion, automation and optimisation of materials and utilities.
In order to execute those strategies, the research firm said Kossan has plans to build a research and development (R&D) centre. It believed that the R&D centre will be developed at one of its existing landbank.
Looking ahead, MIDF Research projected Kossan to register solid growth for both revenue and earnings with the additional capacity production being taken up from Plant 2 and Plant 3.
Moreover, the research firm noted Kossan is expecting higher demand for nitrile gloves.
To differentiate itself from its competitors, MIDF Research pointed out Kossan’s main focus for the production of nitrile gloves is to tap into the market of personal gloves customization instead of producing single specification gloves.
Besides that, the research firm said the group also expects demand of gloves to arise from the household market as there is currently a higher awareness of personal hygiene amongst the public due to the spread of various diseases rather than focusing on the medical market.
At this juncture, MIDF Research maintained its earnings forecast for the glove manufacturer as the company’s future expansion growth has been imputed into its assumptions.