Kossan Rubber expected to bounce back after 'unexciting' FY16

PETALING JAYA: AmInvestment Bank has reiterated its “buy” call on Kossan Rubber Industries Bhd (KRI) with a higher fair value of RM8.64 from RM7.51 previously based on expectations of higher net profit in the second half of FY17. This represents an upside of 23% from its closing price of RM7.05 yesterday.
“After an unexciting FY16, marked by plant maintenance works, absence of capacity expansions and a price war in 2H’16, KRI’s net profit is expected to improve from 2H’17 onwards,” it said in a report yesterday.
AmInvestment expects KRI’s net profit to grow by 15% in FY18 on the back of higher production capacity. Its net profit forecasts for FY17 and FY18 are RM218.7 million and RM251.1 million respectively.
KRI is expected to add one production plant in FY17, which would raise annual production capacity from 22 billion to 25 billion gloves. The group’s production capacity is expected to expand from 25 billion to 29.5 billion gloves by end-FY18 due to the addition of two plants. It expects KRI’s long-term profit growth to be underpinned by its commitment to research and development (R&D).
The group’s R&D centre in Meru, Klang, will focus on ways to increase automation and efficiency, which will help reduce operating costs. It will focus on optimising or finding the most efficient chemicals to use, developing ways to automate processes to reduce reliance on foreign labour and introducing new technology, among others.
The R&D centre is expected to cost RM15 million to RM20 million, and is set to open at the end of FY17.