• Kossan Rubber Industries (Kossan) has announced that its wholly-owned subsidiary Ideal Quality Sdn Bhd (IQ) is disposing of an unutilized land measuring 390K sq metres in Kuala Langat for a total cash consideration of RM147.7mil.

• The land which was purchased by IQ on 30 August 2017 has an audited net book value of RM96.7mil. The disposal is expected to result in a net gain of around RM35.4mil and gearing of 0.38x (0.39x previously).

• The group’s long-term strategy involves reducing duplicating operating expenses and achieving synergistic savings. As such, Kossan had acquired 2 pieces of land in Bidor, Perak measuring 35.9mil sq ft on 12 March 2018 in order to centralize its future expansions.

• The proceeds from the disposal will be utilized to hasten the development of the Bidor land.

• We are positive on the disposal as it allows the group to utilize its resources on its expansion plans which will boost profitability in the long term. We believe the group plans to complete its first plant in Bidor in FY22F.

• The disposal is expected to improve earnings in FY20F by circa 1.9% from interest savings.

• We maintain our BUY call on Kossan with an unchanged FV of RM4.65/share. Our valuation is based on a P/E of 22x FY20F EPS.

• We like Kossan for its expansionary plans and efforts in improving quality and operational efficiency through revamping and upgrading works on its older plants and better automation in its newer plants.

Source: AmInvest Research - 17 Jan 2020