Kossan owns up to wrong judgment

Kossan owns up to wrong judgment

Tags: forex hedging Kossan Lim Kuang Sia

Written by Tony C H Goh
Monday, 27 July 2009 11:05

KUALA LUMPUR: KOSSAN RUBBER INDUSTRIES BHD [] chief executive officer Lim Kuang Sia has owned up to making a wrong judgment in carrying out speculative foreign exchange (forex) hedging.

“It is not the company’s policy to engage in speculative hedge, and we assure our investors that this kind of wrong judgment call will not happen again,” he told The Edge Financial Daily in a telephone interview last Friday.

Lim was responding to analysts’ reports that the glove maker may incur an estimated forex loss of RM8 million to RM9 million in the second quarter ended June 30, 2009 (2QFY09), after having written off RM12 million in similar losses in 1QFY09.

The losses spilled over from last year when Kossan hedged its receivables at an average contract of RM3.37 to the US dollar in anticipation of further weaknesses in the US currency. Instead, the dollar strengthened against the ringgit.

Lim said he did not expect any major impact from the forex losses this year.

“We are confident that the forex losses will fizzle out by the end of this financial year. In fact, a turnaround is expected to begin from the second half of this year and what happened was something that is common for industries that are involved in exports,” he said.

OSK Research said in its latest update on the company that FY09 would be a challenging year for Kossan, as it had to deal with unforeseen events such as a factory fire in May that disrupted much-needed production and the slowdown in the automotive sector that dampened demand for its technical gloves.

However, the research house said the problem of forex losses was not unique to Kossan, citing the example of ADVENTA BHD [] which incurred a forex loss of RM4.3 million in 1QFY09 and also in 2QFY09, which wiped out more than 50% of its quarterly net profit.

Other major glove makers such as Top Glove Corp Bhd, Supermax Corp Bhd and HARTALEGA HOLDINGS BHD [] were also believed to have suffered forex losses although their hedging exposure was less significant, according to OSK Research.

Lim said Kossan’s business strategies, including capacity expansion and a better product mix, were paying off. He anticipated supply to remain tight this year but said the positive results of its measures would be reflected in the next fiscal year, as the company’s internal projections were on track.

Kossan’s plant is running at around 95% of capacity and it expects to produce 9.3 billion to 9.5 billion gloves this year, an increase of 8%-10% from 8.5 billion last year. About a quarter of its total production would consist of higher-end nitrile gloves.

Nitrile gloves fetch a better selling price of US$27.50-US$28.50 per 1,000 pieces, compared with US$24-US$25 for natural rubber gloves. It also offers 10% to 15% higher margin than conventional rubber gloves.

OSK Research is maintaining a buy call on Kossan with a target price of RM4.48, in anticipation of the turnaround next year and the overall favourable view on the glove industry. The research house added that it was keeping Kossan’s FY09 forecast of RM62.5 million in net profit on revenue of RM964.7 million unchanged, until confirmation on the actual amount of forex loss.

“We believe investors would be buying the stock now for next year rather than 2009. There should also be recovery in the automotive sector, which will spur demand for its technical rubber products, and the overall recovery in the global economy should boost the demand for gloves, especially from the non-medical segment,” said OSK Research.

It said some of the growth catalysts for FY10 would include the commissioning of all its 22 new lines, which should be running at optimum level, thus enlarging its nitrile contribution to 40% from 25% now.


This article appeared in The Edge Financial Daily, July 27, 2009.