TA initiates coverage on Kossan with 'buy' call, TP RM6.80

by **Cals** Tue 13 Aug 2013, 01:41

TA initiates coverage on Kossan with 'buy' call, TP RM6.80
Business & Markets 2013
Written by Jeffrey Tan of theedgemalaysia.com
Monday, 12 August 2013 19:21

KUALA LUMPUR (August 12): TA Research has initiated coverage on KOSSAN RUBBER INDUSTRIES BHD [] with a "buy" call and a target price of RM6.80.

In a note today, TA said the recommendation takes into account Kossan's aggressive expansion to double its glove production capacity to 32 billion pieces per annum by 2018.

"All in all, we like Kossan for its affordable exposure to the glove
manufacturing industry. Kossan’s FY14 PER (price-to-earnings ratio) of 12.4x is undemanding versus the industry’s average of 14.7x," TA said.

According to TA, Kossan's expansion within 28ha (70 acres) of industrial land with natural gas supply is expected to improve the latter's profit margins.

The higher profitability is by virtue of lower production cost per glove and higher production efficiency.

Kossan's shift towards higher-margin gloves is also seen as positive.

TA said the production of special purpose, nitrile and latex powdered-free gloves are expected to fetch higher profit margins due to lower levels of competition.

Nevertheless, TA has cautioned the market on an expected rise in natural gas prices from RM16.07/mmbtu to RM40/mmbtu which could hamper the cost efficiency of Kossan which is also a manufacturer of technical rubber products.

In addition, competition from local glove manufacturers' capacity expansion may heighten the risk of price war, according to the research firm.