KUALA LUMPUR: Kossan Rubber Industries Bhd is embarking on a multi-pronged strategy for its next phase of growth. It involves the expansion of its glove manufacturing business and diversification into non-rubber products to create synergy.
The company plans to grow its annual glove production capacity by 42% to 17 billion pieces in the next two years, a crucial move to expand its product range and tap new markets. It is also seeking mergers and acquisitions (M&A) to grow its non-rubber product portfolio and diversify its income base.
Datuk Lim Kuang Sia, managing director and CEO, said Kossan, which currently has an annual glove capacity of 12 billion pieces, will build new factories and refurbish existing ones to increase output.
“We always prepare for tomorrow,” Lim told The Edge Financial Daily in an interview. Kossan already has 13 factories in Klang, of which 10 are for glove production, while the remaining three are for technical rubber products (TRP).
The 10 glove factories, with a total of 160 lines, have a combined annual capacity of 12 billion gloves. For now, natural rubber gloves make up 55% of total capacity while nitrile or synthetic rubber gloves constitute the balance of 45%.
For comparison, world rubber glove demand is seen at some 150 billion pieces this year, and is expected to register an annual growth of 8% to 10%. Malaysia is the world’s largest rubber glove producer, with about 60% of the global market.
Lim said Kossan’s immediate plans include the construction of two new factories — each dedicated to surgical and nitrile gloves — in Klang.
These plants will add another two billion gloves to Kossan’s existing capacity, translating into 14 billion gloves a year by June 2012, he said. The surgical glove plant will have a capacity of 600 million pieces while the nitrile facility will have an output of 1.4 billion gloves.
Lim said these factories will involve a capital expenditure of some RM60 million which could be equally shared between the manufacturing facilities. Kossan’s factories, which are about 90% utilised, are interchangeable for natural rubber and nitrile glove production.
By 2013, its annual glove capacity is expected to reach 17 million gloves, helped by the manufacturer’s 200 production lines by then, said Lim. Nitrile gloves are expected to account for 60% of capacity while natural rubber gloves will make up the remaining 40%.
Lim said Kossan focuses on high-end gloves for the medical and non-medical sectors as this segment has a higher barrier of entry. He said the company intends to grow its portfolio from mainly medical examination gloves, to include surgical, cleanroom, sterilised and special application gloves.
Product diversification via M&A is seen as a crucial component of Kossan’s growth strategy. Lim said the company might acquire more companies dealing in non-rubber products such as face masks for the medical sector and antistatic wipes for the semiconductor industry.
He said these potential M&A must create synergy for Kossan, adding that the company’s healthy balance sheet will enable it to undertake such exercises. As at June 30 this year, Kossan had cash of RM84 million against borrowings of RM146.28 million, translating into net debt of RM62.28 million or net gearing of 0.13 times. The company’s shareholders’ funds stood at RM486.06 million.
Last June, Kossan acquired a controlling 51% stake in Hong Kong-based Cleanera HK Ltd for US$3.06 million (RM9.52 million). Cleanera manufactures cleanroom products such as masks, wipes and gloves.
“Inorganic growth can help us grow faster,” said Lim, who expects Kossan to achieve 15% revenue growth in FY12 ending Dec 31. This follows an expected weaker performance in the current year.
Estimates by analysts polled by Bloomberg indicate that Kossan will register net profit of RM105.53 million and revenue of RM1.23 billion for FY11. This compares to FY10 net profit and revenue of RM113.38 million and RM1.05 billion.
With consensus earnings per share of 32.7 sen for FY11, the stock, at RM2.83, is trading at a price-earnings ratio of a low 8.9 times.
Kossan’s latest results have weakened. In 1HFY11ended June 30, the firm saw its net profit fall 27% to RM43.89 million from RM60.39 million a year earlier, though revenue rose 2% to RM532.06 million from RM519.26 million.
While the company benefited from higher selling prices for its products, costlier natural rubber — its main raw material — crimped its bottom line, the company said in notes accompanying its financials.
Natural rubber accounts for some 60% of the glove producer’s costs. Over the last six months, the rubber price reached a high of RM10.01 a kg on April 27 and a low of RM7.94 on Oct 24.
Natural rubber prices have recently fallen along with other commodities due to concern over global a recession. This, along with the strengthening US dollar, should ease cost and margin pressures, but demand and overcapacity concerns remain.
Kossan’s glove division accounted for 87% of its revenue during the first half, while TRP made up the remaining 13%, according to the firm. Its gloves are entirely exported while about 60% of its TRP are sold abroad.
Kossan’s external transactions are done in US dollars. Hence, the company will lose out if the ringgit strengthens against the greenback, which was the trend for much of this year until the last two to three months when the financial market rout started.
Over the last six months, the ringgit traded at a high of 2.939 against the US dollar on July 27, and a low of 3.2048 on Oct 3.
From those lows, the ringgit gradually strengthened to 3.11 last Friday.
Economists said the weakening of Asian currencies, including the ringgit, against a firmer US dollar in recent weeks is a short-term phenomenon as global investors flocked to the greenback as a safe haven and unwind their US-dollar carry trades.
However, in the longer run, it is anticipated that Asian currencies will regain their strength against the US dollar given the prevailing growth and interest rate differential between emerging and advanced economies. The US dollar is also expected to weaken due to the country’s weak fiscal and trade balance dynamics, they said.
Kossan’s Lim said considering that Thailand is a rival glove exporter, a slower appreciation in the value of the baht against the US dollar compared to the ringgit could result in less competitive pricing for Malaysian-made gloves.
“(However) the impact is mild compared to latex prices,” he said. According to Lim, latex has a greater influence on average selling prices of gloves than other cost components.
Kossan’s TRP segment is worth watching. Lim said the division is expected to register up to 15% growth in annual turnover, as the company embarks on strategic partnerships with its customers in the US who are also TRP manufacturers.
The collaboration will essentially help Kossan secure a wider geographical reach for its TRP, especially in the global automotive sector, he said. The company’s TRP portfolio also includes components for the marine, construction and aerospace sectors.
Lim said Kossan is assessing the feasibility of acquiring rubber plantation land in Malaysia and Cambodia. The company is considering offers from Cambodia. Any acquisitions would merely be a form of investment to diversify the company’s income base.
“Technically, it will not have anything to do with our glove operations,” he said.
Kossan shares ended three sen higher at RM2.83 last Friday, giving the company a market capitalisation of RM904.85 million. The stock has declined 11% this year against the FBM KLCI’s 2% fall, and has slumped 17% from a high of RM3.40 on March 31, 2011.
This article appeared in The Edge Financial Daily, November 8, 2011.
The company plans to grow its annual glove production capacity by 42% to 17 billion pieces in the next two years, a crucial move to expand its product range and tap new markets. It is also seeking mergers and acquisitions (M&A) to grow its non-rubber product portfolio and diversify its income base.
Datuk Lim Kuang Sia, managing director and CEO, said Kossan, which currently has an annual glove capacity of 12 billion pieces, will build new factories and refurbish existing ones to increase output.
“We always prepare for tomorrow,” Lim told The Edge Financial Daily in an interview. Kossan already has 13 factories in Klang, of which 10 are for glove production, while the remaining three are for technical rubber products (TRP).
The 10 glove factories, with a total of 160 lines, have a combined annual capacity of 12 billion gloves. For now, natural rubber gloves make up 55% of total capacity while nitrile or synthetic rubber gloves constitute the balance of 45%.
For comparison, world rubber glove demand is seen at some 150 billion pieces this year, and is expected to register an annual growth of 8% to 10%. Malaysia is the world’s largest rubber glove producer, with about 60% of the global market.
Lim: Kossan's plans include the construction of two new factories
- each dedicated to surgical land nitrile gloves - in Klang.
- each dedicated to surgical land nitrile gloves - in Klang.
Lim said Kossan’s immediate plans include the construction of two new factories — each dedicated to surgical and nitrile gloves — in Klang.
These plants will add another two billion gloves to Kossan’s existing capacity, translating into 14 billion gloves a year by June 2012, he said. The surgical glove plant will have a capacity of 600 million pieces while the nitrile facility will have an output of 1.4 billion gloves.
Lim said these factories will involve a capital expenditure of some RM60 million which could be equally shared between the manufacturing facilities. Kossan’s factories, which are about 90% utilised, are interchangeable for natural rubber and nitrile glove production.
By 2013, its annual glove capacity is expected to reach 17 million gloves, helped by the manufacturer’s 200 production lines by then, said Lim. Nitrile gloves are expected to account for 60% of capacity while natural rubber gloves will make up the remaining 40%.
Lim said Kossan focuses on high-end gloves for the medical and non-medical sectors as this segment has a higher barrier of entry. He said the company intends to grow its portfolio from mainly medical examination gloves, to include surgical, cleanroom, sterilised and special application gloves.
Product diversification via M&A is seen as a crucial component of Kossan’s growth strategy. Lim said the company might acquire more companies dealing in non-rubber products such as face masks for the medical sector and antistatic wipes for the semiconductor industry.
He said these potential M&A must create synergy for Kossan, adding that the company’s healthy balance sheet will enable it to undertake such exercises. As at June 30 this year, Kossan had cash of RM84 million against borrowings of RM146.28 million, translating into net debt of RM62.28 million or net gearing of 0.13 times. The company’s shareholders’ funds stood at RM486.06 million.
Last June, Kossan acquired a controlling 51% stake in Hong Kong-based Cleanera HK Ltd for US$3.06 million (RM9.52 million). Cleanera manufactures cleanroom products such as masks, wipes and gloves.
“Inorganic growth can help us grow faster,” said Lim, who expects Kossan to achieve 15% revenue growth in FY12 ending Dec 31. This follows an expected weaker performance in the current year.
Estimates by analysts polled by Bloomberg indicate that Kossan will register net profit of RM105.53 million and revenue of RM1.23 billion for FY11. This compares to FY10 net profit and revenue of RM113.38 million and RM1.05 billion.
With consensus earnings per share of 32.7 sen for FY11, the stock, at RM2.83, is trading at a price-earnings ratio of a low 8.9 times.
Kossan’s latest results have weakened. In 1HFY11ended June 30, the firm saw its net profit fall 27% to RM43.89 million from RM60.39 million a year earlier, though revenue rose 2% to RM532.06 million from RM519.26 million.
While the company benefited from higher selling prices for its products, costlier natural rubber — its main raw material — crimped its bottom line, the company said in notes accompanying its financials.
Natural rubber accounts for some 60% of the glove producer’s costs. Over the last six months, the rubber price reached a high of RM10.01 a kg on April 27 and a low of RM7.94 on Oct 24.
Natural rubber prices have recently fallen along with other commodities due to concern over global a recession. This, along with the strengthening US dollar, should ease cost and margin pressures, but demand and overcapacity concerns remain.
Kossan’s glove division accounted for 87% of its revenue during the first half, while TRP made up the remaining 13%, according to the firm. Its gloves are entirely exported while about 60% of its TRP are sold abroad.
Kossan’s external transactions are done in US dollars. Hence, the company will lose out if the ringgit strengthens against the greenback, which was the trend for much of this year until the last two to three months when the financial market rout started.
Over the last six months, the ringgit traded at a high of 2.939 against the US dollar on July 27, and a low of 3.2048 on Oct 3.
From those lows, the ringgit gradually strengthened to 3.11 last Friday.
Economists said the weakening of Asian currencies, including the ringgit, against a firmer US dollar in recent weeks is a short-term phenomenon as global investors flocked to the greenback as a safe haven and unwind their US-dollar carry trades.
However, in the longer run, it is anticipated that Asian currencies will regain their strength against the US dollar given the prevailing growth and interest rate differential between emerging and advanced economies. The US dollar is also expected to weaken due to the country’s weak fiscal and trade balance dynamics, they said.
Kossan’s Lim said considering that Thailand is a rival glove exporter, a slower appreciation in the value of the baht against the US dollar compared to the ringgit could result in less competitive pricing for Malaysian-made gloves.
“(However) the impact is mild compared to latex prices,” he said. According to Lim, latex has a greater influence on average selling prices of gloves than other cost components.
Kossan’s TRP segment is worth watching. Lim said the division is expected to register up to 15% growth in annual turnover, as the company embarks on strategic partnerships with its customers in the US who are also TRP manufacturers.
The collaboration will essentially help Kossan secure a wider geographical reach for its TRP, especially in the global automotive sector, he said. The company’s TRP portfolio also includes components for the marine, construction and aerospace sectors.
Lim said Kossan is assessing the feasibility of acquiring rubber plantation land in Malaysia and Cambodia. The company is considering offers from Cambodia. Any acquisitions would merely be a form of investment to diversify the company’s income base.
“Technically, it will not have anything to do with our glove operations,” he said.
Kossan shares ended three sen higher at RM2.83 last Friday, giving the company a market capitalisation of RM904.85 million. The stock has declined 11% this year against the FBM KLCI’s 2% fall, and has slumped 17% from a high of RM3.40 on March 31, 2011.
This article appeared in The Edge Financial Daily, November 8, 2011.
