This article first appeared in The Edge Financial Daily, on October 12, 2015.

Kossan Rubber Industries Bhd
(Oct 9, RM7.74)
Maintain hold with a higher target price of RM7.35 from RM7.30: Kossan Rubber Industries Bhd has recently commissioned its three new glove plants 17, 18 and 19, taking its annual capacity to 22 billion gloves.

Going forward, it targets to build two new plants each year over the next five years. It plans to start construction of two more nitrile glove plants, which will be able to produce 4.5 billion gloves per annum.

Construction is expected to start in the fourth quarter, with a target commercial production date in financial year 2017 (FY17).

We conservatively forecast that Kossan will grow sales volume at a 14% compound annual growth rate (CAGR) from FY15 to FY17, which is slightly below its capacity growth of a 16% CAGR over the period.

However, we expect earnings growth to be stronger at 22%, on the back of higher unit profitability from a stronger US dollar and efficiency gains.

We expect the share price to hover at this level for now, as the near-term prospects have been largely priced in.

Kossan is facing rising competition as other glove makers are crowding into the nitrile glove segment. This could pressure Kossan’s unit profitability going forward. — AllianceDBS, Oct 9