Kossan Rubber Industries Bhd
Shares for the four biggest glove makers have far outperformed the broader market in the year-to-date. This we believe is due, in no small part, to the precipitous drop in the ringgit against the US dollar — glove makers are, primarily, exporters.

The current environment of low commodity prices would also favour the industry. Low oil and rubber prices translate into cheaper selling prices — which will, in turn, be the perfect time to encourage greater adoption/consumption. This is particularly true in developing countries, including China, where per capita consumption is still very low — and where usage is more price-sensitive.

Since Kossan (Fundamental: 2.1/3, Valuation: 0.5/3) was first featured by InsiderAsia, on October 15, 2014, its shares have gained 31.6% to close at RM5.71 yesterday.

The stock is not cheap, trading at trailing P/E of 25 times against the broader market average of 16 times. By comparison, Top Glove and Supermax are trading at 14-17 times although Hartalega is priced at nearly 33 times.  

Nevertheless, we expect earnings growth to far outpace that of the broader market.

Kossan boosted annual production capacity by 38% to 22 billion pieces at end-2014 and plans to raise this further this year, on the back of strong orders for its glove products.

Furthermore, the company started shifting towards nitrile gloves, which offer better margins compared to natural rubber gloves, in 2013. It aims to hit nitrile to natural rubber mix of 70:30 this year, compared to 57:43 last year.

Its return on equity (ROE) — with modest gearing — of 19.8% is one of the highest in the industry. Utilization is consistently high, above 85%. By comparison, ROE for Top Glove and Supermax stood at 14% and 11%, respectively, while Hartalega, which manufactures mainly nitrile gloves, has a high ROE of over 21%.

This article first appeared in The Edge Financial Daily, on April 13, 2015.