KOSSAN: Operational Outlook Stabilizes on Cost Efficiencies and Volume Recovery

The operational outlook for a major technical rubber products manufacturer is expected to remain steady for FY26F, driven primarily by a gradual recovery in volume and strategic cost optimisation initiatives. Despite a competitive industry landscape, management has expressed increasing confidence in internal levers, including labour rationalisation, automation, and potential land monetisation, all geared towards bolstering earnings sustainability.

Performance Review and Future Outlook

Management projects a 10-15% volume growth for FY26F, underpinned by robust order books. This growth is also supported by the nearing completion of a new natural rubber glove plant, which will add nine production lines. While Average Selling Prices (ASPs) remain competitive, Malaysian gloves continue to command a premium of approximately USD0.50-0.80 per thousand pieces due to superior quality and consistency. The company also plans to expand its clean-room glove capacity from roughly 0.6% to 3-4% of total capacity next year, specifically targeting semiconductor users.

The Group anticipates achieving at least RM100 million in annual earnings for FY26F, though analysts believe a higher profit is attainable due to strong cost-optimisation efforts. Key focus areas include enhancing labour efficiency and automation, which are expected to generate savings of about RM1,000 per million pieces. Plans are also underway to reduce the workforce to below 3,000 from the current level of under 5,000. Additionally, the company is exploring potential land monetisation opportunities, given the low acquisition cost of its 824-acre landbank in Bidor, Perak, and 57-acre in Batang Berjuntai, Selangor.

For the full year FY25F, a dividend of 4 sen per share is anticipated, implying an estimated payout ratio of approximately 80%. The company maintains a strong financial position, with a net cash balance of RM1.6 billion as of the end of September.

Market Conditions and Recommendation

The industry continues to face competitive conditions, which contributed to a previous downward revision of the target price. However, management has largely mitigated foreign exchange exposure, with certain committed orders for 1QFY26 hedged at around RM4.15 per USD through May 2026, limiting near-term currency risk to margins. Raw material costs also remain USD-linked, further buffering the impact of potential USD weakness.

Analysts reiterate an “Outperform” call, despite a revised target price of RM1.50 (down from RM2.33 previously). The revised target is based on a 1-year historical average of 1.0x Price-to-Book (P/B) multiple, adjusted for the competitive industry environment, compared to the prior 1.6x P/B. The stock is currently trading at an undemanding 0.7x 1-year rolling forward P/B.