Highlights

Kossan Rubber Industries - Acquisition in Meru, Klang

Date: 07/07/2020

Source  :  HLG
Stock  :  KOSSAN       Price Target  :  11.69      |      Price Call  :  BUY
        Last Price  :  6.25      |      Upside/Downside  :  +5.44 (87.04%)
 


Kossan entered into a SPA to acquire 4.05 hectares of land in Meru from CBIP for RM40m. The deal is expected to be completed by 3Q20. We are positive on the acquisition as this will enable Kossan to increase its capacity and perhaps to allocate more of its production to spot orders (current capacity is 29bn pieces). Furthermore, the property adjoins Kossan’s existing production facilities and hence, the acquisition will enable it to expand its facilities without much hassle as all utilities are available. Our proforma net gearing ratio is expected to increase to 29.5% post acquisition, from 26.8% in 1Q20. Post acquisition, we expect interest expense to increase c.6% but it may not be immediately accompanied by new revenue as management has yet to unveil its expansion plans. Separately, after conducting some channel checks, we took the opportunity to impute higher ASPs (c.+10% YoY) from recent Covid-19 tailwind (stronger demand, and more spot order s). Net-net, we raise our FY20- 21 earnings by +10%/+13%. Our TP increase to RM11.69 (from RM10.22) Maintain BUY. Our TP is derived from FY21 earnings pegged to PE of 31x (2SD above 5 year mean).

NEWSBREAK

Kossan has entered into a Sale and Purchase Agreement (SPA) with CBIP (HOLD, TP: RM0.83) to acquire a freehold industrial property measuring 4.0494 hectares for a total cash consideration of RM40m. The proposed acquisition is expected to be completed by 3Q20. The land is located at Lot 6074, Jalan Haji Abdul Manan, Meru, under Mukim Kapar, Daerah Klang, Selangor. The property would include 2-storey detached factories, a 3- storey office building, a single storey canteen, a guard house and a surau building.

HLIB’s VIEW

Positive on the news. We are positive on the acquisition. We expect the new acquisition will enable Kossan to increase its capacity and also to be able to allocate more of its production to spot orders (current capacity is 29bn pieces). Furthermore, the property adjoins Kossan’s existing production facilities hence the acquisition will enable it to expand its facilities without much hassle as all utilities (i.e. water, electricity and natural gas) are available. The land acquisition is scheduled for completion by 3Q20.

Gearing. Kossan intends to fund the proposed acquisition via internally generated funds and/or bank borrowings. Our proforma net gearing ratio is expected to increase to 29.5% post acquisition (from 26.8% as at 1Q20).

Forecast. Post-acquisition, we expect interest expense to increase c.6% but it may not immediately be accompanied by new revenue as management has yet to unveil its expansion plans. Separately, after conducting some channel checks, we took the opportunity to impute higher ASPs (c.+10% YoY) from recent Covid-19 tailwind (stronger demand, and more spot orders). Net-net, we raise our FY20-21 earnings by +10%/+13%.

Maintain BUY, TP: RM11.69. Post earnings adjustments, our TP increases to RM11.69. Maintain BUY. Our TP is derived from FY21 earnings pegged to PE of 31x (+2SD above 5-year mean).

Source: Hong Leong Investment Bank Research - 7 Jul 2020

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