For a second consecutive year, Kossan Rubber Industries Bhd has clinched The Edge Billion Ringgit Club (BRC) award for recording the highest growth in profit after tax (PAT) over three years among peers in the healthcare sector. Last year, Kossan also bagged a second award for the highest return on equity, an honour the rubber glove manufacturer last saw in 2010 when it came under the industrial products sector, BRC records show.

While the win had a lot to do with hefty sales volumes and high average selling price (ASP) when Covid-19 hit, Kossan’s PAT was already on an uptrend before the pandemic struck in 2020.

Kossan achieved a risk-weighted three-year compound annual growth rate of 142.6% in PAT between FY2018 and FY2021, which, under the BRC awards methodology, is comparable to Supermax Corp Bhd — with which it is joint winner for this year’s award.

Kossan’s net profit rose from RM199.8 million in FY2018 to RM224.7 million in FY2019, and then surged five times to RM1.09 billion in FY2020 before nearly tripling to RM2.85 billion for FY2021.

The glove maker’s quantum leap in PAT gave the company a return on equity of 70.8% in FY2021 from 45.6% the year before. The group paid out a total dividend of 36 sen per share consisting of three interim dividends of 12 sen over the year. In February, the group added a fourth interim dividend of 12 sen per share, bringing total dividends for FY2021 to 48 sen per share, amounting to a total payout of RM1.22 billion and representing a payout ratio of 42.9%.

In the near term, however, Kossan says it expects the glove industry to be challenging with the tapering of demand for gloves and ASP from the height of the pandemic.

“In any case, rubber gloves remain an indispensable part of the healthcare industry as the contamination and infection control medical device of choice. In the non-medical sector, the functional barrier properties and low absolute unit price of rubber gloves have lent themselves to a broad range of applications across industries and end-uses,” Kossan says.

The group’s strategy is to drive long-term sustainable growth, with capacity expansion via the construction of two plants in Selangor over the next two years projected to increase capacity by five billion pieces of gloves. The first plant, with an installed capacity of two billion pieces, is slated to be completed in the first half of 2023, while the second, with an installed capacity of three billion pieces, is expected to be completed in the second half of the year.

As part of its ongoing transformation, the group has accelerated investments in digitalisation and automation in its plants to increase productivity and efficiency, and to prepare for the next phase of growth.

At the time of writing, Bloomberg data shows five analysts with a “buy” call on the counter, eight “hold” and six “sell”, with an average target price of RM1.27. Sitting on a substantial cash pile, Kossan was trading at a TTM PER (trailing 12 months price-earnings ratio) of 3.29 times and a forward PER of 14.62 times.

In an Aug 4 note, PublicInvest Research observed that Kossan’s cash pile of RM2.2 billion as at 1HFY2022 gave the group “ample room to declare higher dividends if the management so wished”. The bank-backed research house had a “neutral” call with a target price of RM1.23.

“Although management intends to maintain its regular dividend payout ratio at 30%, we believe there is still room for a special dividend.

“Given the delay in capacity expansion, while its automation and transformation plans are not likely to cost more than RM100 million a year, Kossan has sufficient reserves to reward its shareholders,” the research house said.

PublicInvest explained that Kossan’s current capacity is 33.5 billion pieces per annum with near-term expansion plans put on hold amid oversupply issues as well as high construction costs.

In a note dated Sept 28, RHB Research analyst Oong Chun Sung wrote that risks for Kossan “remain tilted towards the downside” while most of “the negative news [for the industry]” had been priced in.

“This also comes on top of a further round of share price corrections stemming from Top Glove’s potential exclusion from the Kuala Lumpur Composite Index followed by passive fund rebalancing post-index re-constitution,” Oong wrote.

Key upside risks include an increase in glove ASPs, faster-than-expected capacity expansion, higher-than-expected utilisation rates and cheaper-than-estimated raw material price.