Saturday, January 25

Kossan’s future net profit margin to be driven by capacity expansions

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KUCHING: Kossan Rubber Industries Bhd’s (Kossan) financial year 2019 (FY19E) and FY20F net profit margin improvements has been projected to be to be driven by capacity expansions, improved internal efficiency and strong demand growth.

Following a visit to Kossan’s Plant 18 last week, AmInvestment Bank Bhd (AmInvestment Bank) gathered that the group’s new plant is expected to achieve higher efficiency levels.

“Kossan plans to introduce an automated packing system to reduce reliance on labour. Plant 18 also uses a SCADA system to ensure that the lines are run optimally,” the research firm said.

“This will help reduce operating costs in the long term. We believe that Kossan’s long-term profit growth would be underpinned by increased automation and efficiency.”

AmInvestment Bank noted that despite the shortage of labour in the third quarter of FY19 (3QFY19), Kossan has now hired enough workers for Plant 18 and the upcoming Plant 19.

Hence, the research firm expected the new plants to run at full capacity.

“We expect labour costs to increase in FY20F due to the higher minimum wage, zero-cost recruitment system and higher number of workers required as the workers have to be given a day off per week.

“However, we expect labour costs to decline gradually due to the instalment of the automated packing machine.”

According to AmInvestment Bank, the group is confident in its ability to pass on costs, despite the influx of capacity.

However, the research firm believed that in the next six to 12 months, there will be
downward pressure on selling prices as a 14 per cent increase in industry capacity exceeds the eight to 10 per cent growth in demand.

“Lower nitrile prices are also expected to exert downward pressure on average selling price (ASP).”

In terms of expansion, AmInvestment Bank noted that Kossan’s Plant 19 is expected to be completed by FY20F with 10 lines and three billion pieces of annual capacity.

“This will increase the group’s total capacity by 10.3 per cent to 32 billion pieces per year.”

It further noted that Kossan plans to expand in Bidor next, with the group planning to complete its first plant in Bidor in FY22F.

“We expect Kossan’s net profit margins in FY19E and FY20F to improve to 9.6 per cent and 10.5 per cent respectively from 9.3 per cent in FY18 underpinned by capacity expansions, improved internal efficiency and strong demand growth.”