Once the company achieves greater automation, an improvement to its operating efficiency is expected, which should lower the cost 

by NURUL SUHAIDI / pic by TMR FILE 

KOSSAN Rubber Industries Bhd’s long-term prospects are expected to be positive given its ongoing automation and digitisation initiatives, environmental, social and corporate governance (ESG) initiatives and solid long-term relationship with customers. 

Public Investment Bank Bhd (PublicInvest), in a research note on Kossan Rubber Industries yesterday, stated in the near term the glovemaker is wary of the impact of margin compression while the Russia-Ukraine conflict may worsen the condition of supply chain constraints. 

It noted labour shortages remain an ongoing issue for most of the manufacturing companies. 

In response to the above, Kossan Rubber Industries has moved to develop automated production lines that could help to reduce its reliance on manual labour, improve efficiency and productivity as well as quality of its products. 

“Once Kossan Rubber Industries achieves greater automation, we expect to see a gradual improvement to its operating efficiency, which should lead to lower cost,” the bank noted. 

PublicInvest maintained a ‘Neutral’ call on Kossan Rubber Industries with a target price of RM1.73 pegged to a price-earnings multiple of 17 times on calendar year 2023 forecast earnings per share of 10.1 sen per share. 

Its labour shortage issues will see the company’s utilisation rate to be capped at the current level of 70%, the investment bank added. 

Kosssan Rubber Industries’ new plant in Meru, Selangor, is expected to be equipped with a fully automated packing system and packaging is the most labour-intensive area in the entire production process. 

The report stated Cukai Makmur is not expected to hit Kossan Rubber Industries as the individual entities earnings are not expected to exceed the RM100 million threshold. 

“As such we revise our financial year 2022 forecast (FY22F) earnings by +13% after removing the effect of Cukai Makmur,” PublicInvest added. 

In terms of expansion, while the bank anticipates the oversupply condition to persist, it believes Kossan Rubber Industries would be least impacted due to its conservative expansion plan. 

The expansion in Meru with 15 lines and annual production capacity of five billion pieces is targeted to complete sometime mid-FY23F. 

Glove demand on the other hand is expected to stay above pre-Covid level due to the growing awareness for hygiene following the global outbreak of Covid-19. 

As part of its expansion strategy, Kossan Rubber Industries is targeting Far East markets where the growth potential is expected to be stronger due to lower per capita consumption (for example Japan’s glove consumption is only 106 pieces compared to the US’ 250 pieces). 

Gas prices are expected to increase by 13%-14% in second half of FY22 due to the higher energy prices. 

Kossan Rubber Industries’ management is taking the initiatives to make the company more ESG-compliant, which should lead to higher ESG-related cost in the future. 

“Couple with a falling average selling price (ASP), though at a slower rate of decline, we expect further margin erosion in the coming quarters for the company,” PublicInvest added. 

Nonetheless, the investment bank believes Kossan Rubber Industries would be able to negotiate for better pricing given its strong business relationship with customers. 

“During the pandemic, Kossan Rubber Industries has restrained from raising ASP drastically to allow its customers to better manage their working capital needs,” the research note added.