Investing in companies that grow and expand over time is one of the goals that many investors will be interested in as profits are expected to rise correspondingly to enrich the shareholders. To grow, companies can choose to expand organically by increasing their production numbers to increase revenue and profits. In this article, we will be highlighting 3 firms that are increasing their production level to drive growth.
1. Golden Energy & Resources (GEAR)
GEAR has been expanding through production ramp-up. They have been successful so far as seen by how they have raised their production level from 4.4 million tonnes to 9.5 million tonnes in 2016.
The company is currently well on track to meet its coal production target for 2017 of 14 million tonnes. Looking at it, it is also within expectations that GEAR would meet its next year’s production target of 18 million tonnes.
The company is prepared to increase their production level by appointing two experienced industry personnel, Bonifasius and Utoro, as president director and director of its subsidiary Golden Energy Mines. Furthermore, the company has also renewed its contract between the firm and its mining contractor Saptaindra Sejati (SIS). The renewed contract will continue until December 2020.
The firm is going to carry out a capital reduction exercise which will see its share capital coming down by US$401.2 million, and at the same time cancelling out the same amount of accumulated losses. The exercise is expected to be completed by the end of December 2017.
GEAR’s coal production ramp-up is significant and will therefore drive its top and bottom lines meaningfully. Analysts at RHB has set a target price of $0.71 on the stock and maintained its Buy call. Currently, GEAR is trading at $0.385.
Going forward, movement in coal prices will have a huge impact on the company, and investors should take note that if demand does not meet the expected level, the company’s increased capacity will not be as beneficial as anticipated.
2. Top Glove Corporation
Top Glove is yet another firm that is expected to drive growth through expanding its production capacity. The business has planned to add two more factories to increase its production lines which will boost its yearly production capacity rise 15 percent from 51.9 billion gloves to 59.7 billion gloves. The two factories will become operational in December 2018.
Top Gear also intends to acquire Aspion Sdn Bhd. If Top Glove succeeds, it would emerge to become the world’s biggest manufacturer of surgical gloves. This acquisition will push up production capacity further, and also help boost gross margin for surgical gloves from the existing 20 to 25 percent, to 30 percent. Although the acquisition is deemed positive due to the accretive earnings, DBS notes that Top Glove will have a larger share base post share issuance.
As of now, DBS has a Hold call on the stock with a target price of RM6.44. Given that the firm’s profitability is likely to increase as the firm expands, investors may want to keep an eye for any weakness in share price which may serve as a good entry point for the stock. Currently, Top Glove is trading at RM8.06.
3. Old Chang Kee Ltd (OCK)
Investors who are familiar with OCK will also notice that the firm has typically pursued expansion through setting up new stores. This has not changed over time as the company is still expected to increase its store counts by five by March 2018, reaching a total of 92 stores.
Since puffs are still the primary profit contributor at OCK, accounting for 30 percent of sales, the company has also made an effort to come up with new flavours to attract customers. These new products are the primary revenue growth driver, typically bringing about 1 to 3 percent of growth.
Also, OCK has incorporated a new factory into its production line, introducing advanced machinery and bumping up capacity. According to Phillip Securities, the “majority of the factory integration is completed and is on track for full integration by 3Q18”.
Overall, growth is expected to be driven by the above-mentioned factors, and Phillip Securities is maintaining their Buy call on the firm with a target price of $0.98. In the near term, increasing raw material costs and cost of integrating the new factory has caused a dent in gross margin. However, the new factory should help to bring down production cost to counter to increase in raw material cost over the long term. Overall, a lower gross margin is expected for the FY18, decreasing from 63 percent to 62.5 percent. Currently, OCK is trading at $0.76.