Comprehensive Analysis of Kossan Rubber Industries and Competitors

Broker: Maybank Investment Bank

Date: November 5, 2024

Kossan Rubber Industries (KRI MK): ESG 2.0 and Financial Performance

Improved ESG Scoring

Kossan Rubber Industries (KRI) has shown a significant improvement in its Environmental, Social, and Governance (ESG) scoring. With the release of its FY23 Annual and Corporate Governance Reports, KRI’s ESG score has increased to an above-average 53/100 from a previous below-average score of 38. While this marks a considerable improvement, the company would benefit from more specific and measurable medium-term ESG targets.

Quantitative “E” and “S” Metrics Analysis

KRI’s overall ESG score is above average but still lags behind peers like Top Glove (TOPG) and Hartalega (HART). KRI’s score is lowered due to increased waste generation and lower recycling rates of non-hazardous waste. However, the company has made strides in reducing carbon emissions, water, energy, and gas intensity. Board diversity is another area where KRI falls short compared to its competitors.

Sustainability Strategy and Blueprint

In FY23, KRI launched its Sustainability Strategy and Blueprint, improved reporting mechanisms, and introduced the KOSSAN Sustainability Centre of Excellence (KSCE). The company also implemented sustainability-related KPIs and aligned its practices with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Despite these advancements, the absence of specific and measurable ESG targets hampers its overall score.

Financial Performance and Projections

KRI boasts the strongest balance sheet among glove makers, with MYR2.1 billion in net cash as of the end of 2Q24. This financial strength, coupled with technological know-how, positions KRI to enhance automation and digitalization across its operations, leading to higher productivity, lower headcount, and improved cost competitiveness.

Share Price and Valuation

The current share price of KRI is MYR2.20, with a 12-month price target of MYR2.57, representing a 19% upside. The company’s market capitalization stands at MYR5.6 billion, with a free float of 42.8%.

Financial Metrics

• Revenue: MYR2,316 million (FY22), MYR1,586 million (FY23), projected to reach MYR2,320 million by FY26
• Core Net Profit: MYR161 million (FY22), MYR57 million (FY23), projected to reach MYR135 million by FY26
• Net Cash: MYR2.1 billion as of 2Q24

Quantitative Parameters

Key environmental metrics for KRI include significant reductions in Scope 1 and 2 emissions, although waste generation has increased. Social metrics show an increase in female workforce representation and senior management roles. Governance metrics indicate a need for more independent and female board members.

Risk and Controversy Scores

KRI has a low-risk rating of 13.4 and a controversy score of 0, indicating no reported incidents. The company faces challenges related to social compliance costs due to its reliance on migrant workers. However, KRI is positioned to mitigate these risks through automation and digitalization.

ESG Targets

KRI has set ambitious ESG targets, including a 45% reduction in GHG emissions by 2030 and attaining carbon neutrality by 2050. The company has made progress in achieving ISO certifications for environmental management and occupational safety but needs to improve its quantitative “E” and “S” metrics.

Comparison with Peers: Top Glove (TOPG) and Hartalega (HART)

Top Glove (HOLD, CP: MYR1.08, TP: MYR1.08)

Top Glove (TOPG) has an ESG score of 56, slightly above average, and higher than KRI’s score. The company’s strengths lie in its diverse board composition, including more Independent Non-Executive Directors and female representation. However, it faces challenges in waste management and recycling, similar to KRI.

Hartalega (BUY; CP: MYR3.27, TP: MYR4.28)

Hartalega (HART) leads the ESG scoring among its peers with a score of 64. The company excels in board diversity and has made significant strides in environmental metrics, including carbon emission reductions and increased recycling rates. HART’s financial performance is also robust, with strong revenue and profit growth projections.

Financial Projections and Key Metrics for Peers

• Top Glove Revenue: Projected to reach MYR1,865 million by FY24
• Hartalega Revenue: Projected to reach MYR2,069 million by FY24
• Top Glove Core Net Profit: Projected to reach MYR116 million by FY24
• Hartalega Core Net Profit: Projected to reach MYR124 million by FY24

Conclusion

Kossan Rubber Industries has made commendable progress in improving its ESG score and financial performance. However, the company needs to set more specific and measurable ESG targets to further enhance its standing. In comparison, peers like Top Glove and Hartalega have higher ESG scores, with Hartalega leading the pack. Investors should consider these factors when making investment decisions in the glove manufacturing sector.