Is Kossan Rubber Industries Bhd The Best Rubber Manufacturer To Invest In Now?

In 1979, Tan Sri Dato’ Lim Kuang Sia had founded Kossan Rubber Industries Bhd, a company now listed on Bursa Malaysia. It was involved in cutlass bearing for the fishing industry. 10 years later, in 1989, Kossan started its venture into glove manufacturing with its first factory in Klang which was capable of producing 720 million pieces of gloves per annum.

Kossan expanded and was subsequently listed on the second board of KLSE in 1996. It was promoted to the main board in 2003. Today, Kossan is among the leading glove manufacturers of the world as it is worth RM 4.37 billion in market capitalization. In this article, I’ll focus on Kossan’s past achievements, their impact on its financial results and provide an update on its future plans. Is Kossan Rubber Industries a good stock to invest in now? Here are the 9 quick things you need to know about Kossan before you invest.

#1: Stock Symbol

Ticker Symbol: KLSE: KOSSAN / KLSE: 7153
Market Capitalization: RM 4.37 Billion (24 April 2018)

Share Price: RM 6.84 (24 April 2018)

Industry: Industrial Products

Syariah Compliant: Yes

#2: 5-Year Growth Plan  

Here, I’ll provide a detailed account of Kossan’s key activities to expand its production capacity over the last 5 years:  

Growth Plan #1:

In 2012, Kossan had the capacity to produce 14.5 billion pieces of gloves per annum. Beginning in June 2013, Kossan has embarked on a strategic growth plan which involved the construction of 3 new plants that host 17 additional production lines to boost its production capacity up to 22.0 billion pieces of gloves per annum by 2015.

Growth Plan #2:

In 2015, Kossan has embarked on the development of one nitrile glove plant in Meru, Klang. This plant has the capacity to produce 3.0 billion gloves per annum. In December 2017, it has completed the construction of nitrile glove plant and thus, expanding Kossan’s production capacity to 25.0 billion pieces of gloves per annum. It is a 72.4% rise from its manufacturing capacity of 14.5 billion gloves per annum in 2012.

   

Source: Annual Reports of Kossan

#3: Profitability

Overall, Kossan has reported growth in both sales and profits over the last 5 years. It is in tandem with its growth in glove production capacity during the period. Revenue had risen from RM 1.23 billion in 2012 to RM 1.96 billion in 2017. Shareholders’ earnings had increased from RM 102.2 million in 2012 to RM 182.1 million in 2017.

In 2015, Kossan has recorded RM 202.5 million in shareholders’ earnings, the highest in the 6-year period. This is because the company had benefited from lower raw material costs and favourable foreign exchange rates in 2015.

Kossan has made a 6-Year Return on Equity (ROE) average of 17.9% a year. It means, the company had generated, on average, RM 17.89 in annual earnings from every RM 100.00 in shareholders’ equity from 2012 to 2017.

Source: Annual Reports of Kossan

Calculated from Figures Obtained from Hup Seng’s Annual Reports

#4: Balance Sheet Strength

Here are the key highlights of Kossan’s balance sheet strength:
Gearing Ratio:

As at 31 December 2017, Kossan has RM 273.6 million in long-term debt and RM 1.16 billion in shareholders’ equity. Hence, its debt-to-equity ratio works out to be 23.69%, which is relatively low-geared as it is below 50.0%.

Cash Reserves:

Kossan has grown its cash reserves over the last 5 years. It has increased from RM 47.7 million in 2011 to RM 210.3 million in 2017. Thus, this allows Kossan to have the financial strength to finance its expansion plans, working capital, R&D, and technology to remain relevant and competitive in the industry.

#5: Future Outlook

Here are the key highlights of Kossan moving forward:

In 2017, Kossan has the capacity to produce 25.0 billion pieces of gloves per annum.

Plant 17 & Plant 18:  
Kossan has commenced its construction of Plant 17 and Plant 18 where both plants are located along Jalan Meru, Klang. The construction of these plants are expected to be completed by 2018 and would increase another 4.5 billion to as much as 29.5 billion pieces of gloves per annum by 2018.

Bestari Jaya

Kossan has plans to build 4 plants on a 56-acre site at Bestari Jaya. Each plant has a production capacity of 4.5 billion gloves per year. Kossan plans to build these plants in 4 phases where each phase consists of the construction of one plant per annum. With a combined capacity of 18.0 billion pieces of gloves, it would gradually increase its total production capacity to 47.5 billion pieces of gloves by year 2023.

Source: Annual Report 2017 of Kossan

Kuala Langat

In August 2017, Kossan has acquired a piece of land at Kuala Langat with the size of 98 acres. It is intended for the future expansion of its glove production capacity over the long-term.

Cleanera

On 4 December 2017, Kossan has acquired 26.97% shareholdings of Cleanera HK Ltd (Cleanera) for US$ 1.6 million or RM 6.5 million. Thus, Kossan raises its stake in Cleanera to 82% shareholdings. This allows Kossan to further tap into the growth in the Cleanroom industry in China in the future.

#6: Share Split

In April 2018, Kossan has announced its proposal to split 1 existing ordinary shares into 2 ordinary shares. It is intended to improve trading liquidity of its shares as Kossan’s stock price would be more affordable. Barring unforeseen circumstances, the share split would be completed by Q3 2018.

#7: Valuation

As I write, Kossan is trading at RM 6.84 a share.

In 2017, Kossan has reported earnings per share (EPS) of 28.5 sen. Hence, its current P/E Ratio works out to be 24.0. In 2017, Kossan has reported to have RM 1.806 in net assets a share. Hence, it has a current P/B Ratio of 3.79.  

In 2017, Kossan has declared and paid out dividends per share (DPS) of 11.0 sen. Thus, if Kossan is able to maintain its DPS at 11.0 sen, I would expect to make 1.61% in dividend yields.

#8: Investors Relation

For further enquiries or to request for additional investment information on Kossan’s Investors Relation matters, you may contact:

 

Website: http://www.kossan.com.my/investors/index.html

#9: Major Shareholders

As at 15 March 2018, the substantial shareholders of Kossan Rubber Industries Bhd and their respective shareholdings are as followed:

– Kossan Holdings (M) Sdn Bhd: 51.06%

– Employees Provident Fund Board: 8.53%

– Kumpulan Wang Persaraan (Diperbadankan): 3.75%

– Tian Senn Resources Sdn Bhd: 1.56%

– Public Ittikal Sequel Fund: 1.31%

Note:

Tan Sri Dato’ Lim Kuang Sia is appointed as the CEO of Kossan and is the ultimate shareholder of Kossan with his interests in Kossan Holdings (M) Sdn Bhd.

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Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

4 thoughts on “Is Kossan Rubber Industries Bhd The Best Rubber Manufacturer To Invest In Now?

  • May 5, 2018 at 10:04 am
    Permalink

    Global glove industry are projected to grow only 6-8% per year, and yet most glove companies including Kossan are trading at PE of above 20. Should we be cautious or worry about possible oversupply issue since most glove companies are expanding their production capabilities in the next few years?

    Reply
    • May 5, 2018 at 9:43 pm
      Permalink

      Hi, the concern of oversupply can been around for many years. Yet, it seems that most glove makers are still expanding. We are seeing margins definitely decreasing, but demand is really still growing.
      So there is indeed shorter-term risk of oversupply in the industry. But the longer term growth is still quite promising.

      Reply
      • May 8, 2018 at 12:08 pm
        Permalink

        I see thank you for your explanation… yes the oversupply talk has been around for quite a while, but temporary they got gotten some tailwind from less supply from China competitors due to tightening of environmental policy.

        Is the demand driven more by clean room or more by healthcare industry?

        Reply
        • May 13, 2018 at 11:34 pm
          Permalink

          Mostly still from healthcare at the moment, given that healthcare usage is just so much more than the cleanroom gloves. But cleanroom gloves do have higher margins. I am not aware of the breakdown between Cleanroom and Healthcare gloves for Kossan. But a company that is more focused on cleanroom glove is Riverstone Holdings, listed in Singapore.

          Reply

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