KOSSAN RUBBER INDUSTRIES BHD

Target Price: RM9.57

KOSSAN Rubber Industries Bhd has entered into a sale and purchase agreement with Perbadanan Kemajuan Negeri Perak to acquire two plots of land for a total of RM82.4mil.

The land, totalling about 824.1 acres, is located in Batang Padang, Mukim Bidor,

Perak.

CIMB Research deemed the acquisition price at RM100,000 per acre as attractive. One parcel is 6.7 acres of leasehold commercial land and valued at RM0.7mil, while the other is leasehold industrial land of 817.4 acres. Leases for both will expire on Nov 22, 2114.

CIMB said the parcels have been earmarked for capacity expansion for Kossan’s glove manufacturing business.

It estimated the additional capacities would be able to host up to 59 glove plants with an annual capacity of 4.5 billion pieces per plant.

In total, it could add capacity of up to 360 billion pieces per annum assuming that both parcels are maximised to host glove plants.

Kossan believes the land acquisition is attractive in terms of its strategic location (less than two hours from Port Klang), easy availability of workforce in the area and sufficient utility sources (natural gas, water and electricity).

However, CIMB said any capacity expansion on the land parcels is unlikely to happen in the near term given that Kossan has yet to begin expansion works at Bestari Jaya (56 acres).

The research house reckoned this should be viewed as a long-term investment by Kossan.

Kossan aims to build four new plants in phases in Bestari Jaya with a total potential production capacity of 18 billion pieces per annum.

CIMB expects Kossan to start the development in 2019 at the earliest, to be built in stages, with targeted completion in 2023.

Also, on Aug 30, 2017, the group acquired a 98 acres in Kuala Langat, Selangor for RM96mil, although Kossan has yet to make an official statement on its expansion plans for this, CIMB added.

It expects Kossan to fully fund the recent acquisition through bank borrowings. Assuming that this acquisition is fully funded by bank borrowings, the group’s net gearing ratio will rise to 0.23 times.

However, the extra interest cost may lower CIMB’s FY18-20 forecast estimates by 1.3% to 1.7%.

It maintained an “add” call on Kossan shares with an unchanged target price of RM9.57 (22.4 times 2019 price-earnings ratio (PE), a 20% discount to CIMB’s target PE for Hartalega).

All in all, CIMB said it remained upbeat on Kossan on the back of its cheaper valuations compared to peers (Top Glove and Hartalega) and expectations of sequentially stronger earnings delivery in 2018 on the back of its 3 billion (pieces) per annum plant coming online gradually in the first quarter this year.

Downside risks to its recommendation include lower average selling price from stiff pricing competition and further delays in its expansion plans.