Chart 1 represents the return of Kossan Rubber Industries and KLCI index. In year 2004, the Kossan’s stock return is higher than the market return which is 1.1174% and 1.0131%. This implies that Kossan have a high performance in year 2004. The following year, both of Kossan and KLCI index have a negative return which is -1.9569% and -0.0381% respectively. However, the situation has been improved in year 2006. The Kossan’s return has increase to 8.3246% which is highest return during the five years while the market returns is 1.6952%. Nevertheless, the return of Kossan dropped to -1.1743% in year 2007 adversely market return increase to 2.4065% which is higher than Kossan stock return. In year 2008, both returns are dropped to negative return which is -2.1616% and -3.9557% respectively. It is because the inflationary pressures attributed to 5 fold increases of oil prices. Although the Kossan stock return are negative but it also is higher than the market return. In consequence, overall the five years, the Kossan Rubber Industry have a good performance and well prospective for the future.
Malaysian glove industry started in late 80’s and it has been the largest rubber glove exporter in the world for the past 20 years. Malaysia currently controls about 65 percent of the world’s consumption and still remains highly competitive in the world market even for the next 5 to 10 years. The global demand for rubber gloves has increased and expected to grow by 10% annually driven by greater health awareness, more stringent health standards and an aging population. At present though rubber gloves have not been affected much from the global crisis, but the rubber gloves industries are facing stiff competition and higher production costs including latex, crude oil and labor input. Only handful efficient and sizeable glove manufacturers are able to survive and secure the growing demand in gloves. Sime Darby and KLK which were unsuccessful in growing their rubber glove operations would have dominated the industry.
Instead, Kossan have successful in its rubber glove operations. It is because Kossan’s operational efficiency and cost management has managed to minimize the impact of rising costs on operating margins. Kossan is also ambitious and nimble players, who have invested tremendous time and effort to improve quality, achieve efficiency and grow export markets. It is for this reason that the Kossan will continue to dominate the industry as it will become increasingly difficult for new entrants to entry in this industry and achieve economies of scale. Looking forward, Kossan’s management continues to emphasize on higher value added products, focusing on the premium powder-free medical gloves, both in the natural rubber (NR) and nitrile segments. Its management also appears poised to meet any variance in the consumption trend between natural rubber and nitrile gloves, with the company setting in-place highly versatile production lines. Financials KOSSAN TOP GLOVE SUPERMAX Bursa S.Code 7153 7113 7106 Mkt cap (RMmillion) 372.5 1083.8 254.7 Mkt price (RM) 2.33 3.60 0.96 YTD price chg (%) (40.3) (44.6) (56.0) Cons. TP (RM) 3.43 4.49 1.55 TP upside (%) 47.2 24.7 61.5 EPS (RM) 0.38 0.37 0.22 P/E (x) 6.1 9.7 4.4 BV/share (RM) 1.97 2.27 1.54 P/BV (x) 1.2 1.6 0.6 Div/share (RM) 0.09 0.11 0.03 Div yield (%) 4.0 3.1 3.4
Figure 2 represent the rubber glove peer comparison between Kossan, Top Glove and Supermax on year 2008. Over the all, Kossan Rubber Industries Bhd has a good performance compare to other rubber industries. The EPS of Kossan is 38 sen which is higher than 37 sen (Top Glove) and 22 sen (Supermax). This implies that Kossan have a high earning for each share outstanding compare to other rubber gloves industries. At the same time, Kossan have a RM2.33 market price which is higher than Supermax RM0.96 but lower price than Top glove is RM3.60. This also implies that Kossan Rubber have a high value compare to Supermax. Dividend per share of Kossan is also more than Supermax which is RM0.09 and RM0.03 respectively. Based on Kossan’s EPS and P/E ratio, we set the fair value of RM3.43, which is 47% above its current market price. For Top Glove, the fair value is RM4.49 which is 25% above its current market price, and fair value for Supermax is RM1.55 which is 61% above its market price. Due to the intrinsic value is higher than the current market price, so that we duly maintain our buy call. Kossan’s results have matched our expectations despite facing cost pressures and slower global economic. We like Kossan for its production efficiency, high production capacity utilization rate and its focus on the higher-margin nitrile / NR powder-free glove segment growth.
Kossan Rubber Industries Bhd was established in 1979. The company’s manufacturing plants are centered within Klang Valley, Malaysia for ease of management and logistic control which translates into better synergistic effects. Its principal activity is manufacturing latex examination gloves, manufacturing and trading rubber products, fabricating and installing machineries as well as investment holding. The company’s subsidiaries include Kossan Latex Industries (M) Sdn. Bhd., Perusahaan Getah Asas Sdn. Bhd., Hibon Corporation Sdn. Bhd., Doshin Rubber Products (M) Sdn. Bhd., Ideal Quality Sdn. Bhd., Kossan Engineering (M) Sdn. Bhd., and Top Calibre Sdn. Bhd. During the time, Kossan offered a range of cutless bearings that were often used in the marine industry. With a growing market demand for Kossan’s products, Kossan Rubber Industries Bhd continued to progress rapidly and was one of the first companies in Malaysia to venture into glove manufacturing. It then introduced the first glove production line in August 1988. Today, Kossan has a full capacity of 49 state-of-the-art production lines that are able to produce a stunning 3.9 billion pieces of gloves annually.
Kossan joined the Main Board of Bursa Malaysia in 1996 and has been classified as one of the fastest growing companies in Malaysia. Kossan’s stellar performances and strong reputation of good product quality, timely delivery and excellent customer service, numbers of multinational companies in developed countries have resulted in a business network that extends to more than 160 countries around the world and commanding significant world market share in both rubber products and medical gloves. Kossan products are mainly distributed in countries such as United State of America, China, Japan, Korea, Europe, Canada, Europe, Middle East and Australia. Kossan continued to grow and extend its line of quality products. With wide acceptability of its rubber rollers and cutless bearing, it took a step further to introduce PU products 1988 and Ethylene Vinyl Acetate (EVA) products in 1994. In year 2000, Kossan progressed further by developing high-end rubber products such as bridge bearing pads and bridge expansion joint. These products are created to meet current and possibly, future industrial requirements. In 2001, Kossan chalked a new milestone by becoming the OEM manufacturer of marine dock fenders. The following year, Kossan reengineered the facilities to introduce technical rubber and rubber-to mental bonded automotive parts for OEM and replacement markets. With a progressive management and dynamic outlook, Kossan will continuously strive towards better quality, reliability, and services. Kossan are always thinking ahead and their customer’s satisfaction will always be the main focus in everything they do and produce.
In the year 2008 was a year full of challenges from the inflationary pressures attributed to 5 fold increases of oil prices from under $30 to $147 per barrel in the first half of the year which lead bulk latex prices to spiral and hit a high of RM7.20 per kg in the month of July. High commodity prices and unprecedented increases in energy costs announced by the Government severely impaired the well being of not only the glove manufacturers but also manufacturers and exporters across many industries. The year under review saw Kossan operating in a challenging market environment characterised by great fluctuations in RM/USD exchange rate, record high production cost as a result of stiff increments in natural gas and electricity tariff, and volatile raw material costs including both natural and synthetic latex. Nevertheless, Kossan was able to ride over the challenge and delivered a strong set of financial and operational performance through strong business partnerships with world renowned multinational companies from the developed nations, aggressive capacity growth and focused on manufacturing capability building initiatives. To maintain their market leader position in premium medical gloves and TRPs, the Group will continue to focus on R&D. Greater emphasis will be placed on R&D activities that are able to bring down overall production cost through more consistent and stable production flows, minimum idle production times, and reduced production rejects and wastages. With more competitive pricing, Kossan Group is well positioned to compete more effectively in the world market. With their concerted R&D efforts, they achieved another milestone with the invention of a new generation of nitrile glove which is accelerator free and able to minimize risk of chemical allergy. This nitrile glove offers many advantages to its users compared with the conventional nitrile gloves available in the markets. Supported by encouraging feedbacks from their buyers, they are putting more resources and capacity to produce this new product.
Growth rate (g) = ROE Aƒ- b Year Growth rate (g) 2004 0.162 Aƒ- 0.783 = 12.68% 2005 0.18 Aƒ- 0.834 = 15.01% 2006 0.224 Aƒ- 0.814 = 18.23% 2007 0.219 Aƒ-0.831 = 18.20% 2008 0.1974 Aƒ- 0.812 = 16.03% Average growth rates 12.68% + 15.01% + 18.23% + 18.20% + 16.03% 5 = 16.03% 2008 Expected Price/earnings ratio Market value per share Earnings per share = RM 2.88 0.3668 = 7.8517 Expected EPS = EPS Aƒ- (1+g) = 0.3668 Aƒ- 1.1603 =0.4256 Expected market price = 0.4256 Aƒ- 7.8517 = 3.3417 Intrinsic value = Expected market price 1+ Required rate of return = 3.3417 1.021 =RM 3.27 Price/cash flow ratio Market value per share Operating cash flow per share = RM 2.88 57549081/159866976 = 8.00 Expected Cash flow per share = Cash flow per share Aƒ- (1+g) =0.36 Aƒ- 1.1603 =0.4177 Expected market price =0.4177 Aƒ- 8 =3.3416 Intrinsic value: = Expected market price 1+ Required rate of return =3.3416 1.021 = RM 3.27 Price/book value ratio Market value per share Book value per share = 2.88 299858657/159866976 = 1.535 Expected book value per share = book value per shareAƒ- (1+g) =1.8757 Aƒ- 1.1603 =2.1763 Expected market price =2.1763 Aƒ- 1.535 =RM 3.34 Intrinsic value: = Expected market price 1+ Required rate of return = 3.34 1.021 = RM 3.27 Price/sales ratio Market value per share Net sales revenues per share = 2.88 897194335/159866976 = 0.5132 Expected net sales revenues per share = net sales revenues per share Aƒ- (1+g) =5.61 Aƒ- 1.1603 =6.51 Expected market price = 6.51 Aƒ- 0.5132 =3.34 Intrinsic value: = Expected market price 1+ Required rate of return =3.34 1.021 =RM 3.27 According to the above valuation, the intrinsic value of the stock price is RM3.27 per share. Below is the Kossan yearly stock price performance during year 2004 to year 2008 .
HPR = Ending Price – Beginning Price + Dividen Beginning Price Year HPR 2004 3.15 – 2.03 + 0.072 2.03 = 0.5872 2005 1.83 – 3.46 + 0.03 3.46 = -0.4624 2006 4.57 – 2.02 + 0.046 2.02 = 1.2851 2007 3.88 – 4.68 + 0.058 4.68 = -0.1585 2008 2.88 – 3.77 + 0.07 3.77 = -0.2175
Arithmetic Average = Total HPR (%) No. of the period = 58.72% + -46.24% + 128.51% + -15.85% + -21.75% 5 = 103.39% 5 = 20.678% So the annual return is 20.678%. Since this value ignores compounding, it does not represent an equivalent, single quarterly rate for the year. Geometric Average = [(1+HPR2004) Aƒ-(1+HPR2005) Aƒ- (1+HPR2006) Aƒ- (1+HPR2007) Aƒ- (1+HPR2008)]1/5 _ 1 = [(1+0.5872) Aƒ-(1-0.4624) Aƒ-(1+1.2851) Aƒ-(1-0.1585) Aƒ-(1 -0.2175)] 1/5 _ 1 = [1.2839] 1/5 _ 1 = 5.13% A geometric average return is the constant return applied to each period in a range that would result in the compounded return over that range which is 5.13%.
The current ratio is an excellent diagnostic tool as it measures whether or not the business has enough resources to pay its bills over the next 12 months. Then, the quick ratio is measurement of the liquidity position of the business. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business’s quick ratio will be lower than its current ratio. A current ratio of over 1 is good news, generally. On year 2004, the company Kossan has 1.32 times current ratio, after that, the current ratio has a continually drop to 1.00 times on year 2008. Same at the current ratio, the quick ratio of company Kossan has a continually drop from 0.89 times year 2004 to 0.62 times year 2008. However, the liquidity ratio Kossan has decrease year by year, it still have a good liquidity.
The graph indicates that leverage ratio has increasing steadily from 1.79 times in year 2004 to 2.18 times in year 2008. Leverage ratio is measure of debt to total capitalization of the firm. Too high leverage ratio indicate company will face the risk such as, can’t to solve their indebtedness at the time, but too lower leverage ratio indicate company do not efficiency invest their money because too many assets keep on hand. The company Kossan has quite optimum leverage ratio during year 2004 to year 2008 because they maintain between 1.79 times to 2.26 times.
Average collection period indicates how rapidly a firm is collecting its credit, as measured by the average number of days it takes to collect its accounts receivable. On year 2004, the company Kossan has 90 days average collection period, that mean the company average can collect all accounts receivable on year 2004 during the 90 days. The company has improves its collection period during the year 2004 until year 2008. It is speed up the collection period. On year 2004 to year 2008, the company has short down 29 days to 61 days on year 2008. The rapidly company to collecting its credit is good for company because the company can use the cash to invest the other place. The total asset turnover indicates the efficiency of the firm’s use of assets in the sense that it measures the annual sales generated by each RM of assets. We see the result of 1.23 times for year 2004 this means that turnover is 1.23 times bigger than total assets. Another way of saying that is the company Kossan was able to generate sales of RM1.23 for every RM1 of assets it owned. For the year 2006, it was even higher at 1.53 times. For the year 2007, it was drop a lot of times to 1.45 times, but after year 2007 the total asset turnover was rise a lot of times to 1.51 times.
The return on asset (ROA) is measure the company ability to utilize its assets to create profits. The graph indicates that (ROA) has maintaining around 14.02% to 14.84% during the year 2004 to year 2008, that mean the company Kossan can create around 14% profit for each assets. However, the return on equity (ROE) has increasing steadily from 16.82% in year 2004 to 24.87% in year 2007. The net result that (ROE) increase from 16.82% to 21.46%. It is fall a little from year 2007 to year 2008. ROE is measure the income earned on the shareholder’s investment in the business. Overall ROE for company Kossan has increase during year 2004 to year 2008. This is good for each shareholder’s because they can gain more return compare to the previous.
The price-to-earnings ratio (P/E) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. The graph show the company Kossan has a highest P/E ratio on year 2006 compare the other year. A higher P/E ratio indicate bad news for company because investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. However, market-to-book ratio (MB) is measure how much a company worth at present, in comparison with the amount of capital invested by current and past shareholders into it. At the same with P/E ratio, MB ratio has highest on year 2006 compare the other year. A higher MB ratio implies that investors expect management to create more value from a given set of assets.
From the above information, we can conclude that the stock price of Kossan Rubber Industries is undervalued. While Kossan’s beta (correlation factor) to the KLCI is 0.179 and based on our forecast the intrinsic value for that stock is about RM 3.27 per share which is 13.54% above its current market prise RM 2.88 per share. So we recommended to the investor to Buy this stock. Besides that we also can see the company performance is better than group Peer Company such as Supermax Company. Earnings is also expected to be more stronger because of additional capacity and a stronger output of higher value added nitrile glove as the management has also made plan to convert some existing latex glove lines to produce nitrile gloves. We like Kossan for its production efficiency, high production capacity utilization rate and its focus on the glove segment growth. Besides that analysis from Standard & Poor’s also suggest Buy recommendation on Kossan with a lower 12-month target price of MYR3.10. (See Appendix)
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