Saturday, August 24

Kossan’s earnings recovery set to continue

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KUCHING: Kossan Rubber Industries Bhd’s (Kossan) earnings recovery is set to continue, with production volume restored following the completion of major refurbishment works at two older facilities.

UOB Kay Hian Private Ltd’s research arm (UOBKayHian) observed this in a report, noting that further depreciation of the ringgit and industry-wide recovery in glove average selling price (ASP) should result in further sequential margin expansion.

“We expect mid- to high-single-digit quarter-on-quarter (q-o-q) earnings growth on the back of higher glove sales volume contribution arising from a recovery in utilisation rates at two older plants following the completion of major refurbishment works last quarter.

“This was on the back of a quarterly margin expansion on firmer glove ASP and a more favourable US dollar to the ringgit in the first quarter of 2017 (1Q17),” it opined.

The research house also projected a mid- to single-digit q-o-q growth in glove sales volume.

“Despite the absence of new production capacity coming on-stream in 1Q17, we expect Kossan to deliver four to five per cent q-o-q sales volume growth, thanks to the full restoration of glove production volume at two older plants,” it explained.

Aside from that, UOBKayHian pointed out that firmer glove ASP and favourable foreign exchange (forex) impact are expected to lift Kossan’s top-line q-o-q growth.

“Apart from higher q-o-q glove sales volumes, we expect Kossan to benefit from firmer q-o-q nitrile and latex glove ASPs and a firmer US dollar to the ringgit at RM4.45 per US dollar in 1Q17,” it said.

Taking into account the confluence of the above factors, it expect 1Q17 top-line to increase eight to 13 per cent q-o-q.

Meanwhile, it pointed out that Kossan’s product innovation is starting to bear fruit as the group’s newly-patented accelerator-free glove product range, LOW DERMA, was well received among glove distributors.

“While accelerator-free gloves are not new to the industry, our channel checks suggest that Kossan’s newly-patented product line is able to deliver a more meaningful reduction in the likelihood of contracting glove-led allergic reactions such as Type I and particularly Type IV hypersensitivities.

“Notably, the application of Kossan’s LOW DERMA technology to gloves is also the first in the world to be recognised by the US Food & Drug Administration for the prevention of Type IV hypersensitivities,” it explained.

UOBKayHian is positive on this latest development as the new product range would provide a competitive edge against the backdrop of intense price competition in the industry.

As for Kossan’s margins, the research house expect a q-o-q margin expansion, underpinned by better operating leverage arising from the improvement in utilisation rates, firmer glove ASP, and further depreciation of the ringgit against the US dollar.

“These, however, would be partially offset by the steep rebound in both nitrile and latex raw material prices,” it added.

“Furthermore, we expect Kossan to restore production volume growth from 2H17, underpinned by a new plant coming on-stream in June 17, while its four-year strategic expansion plan should offer investors good long-term earnings visibility over the longer term,” UOBKayHian said.