- We reaffirm our BUY recommendation on Kossan Rubber Industries (Kossan) but place our fair value of RM3.80/share under review following another strong run in its share price (+14%) since trading ex-bonus on 6 November 2013 (when we raised our fair value by 21% to RM3.80/share) and the announcement of its solid 9MFY13 earnings.

- In a filing to Bursa Malaysia yesterday, Kossan announced that its wholly-owned subsidiary, Ideal Quality Sdn Bhd, had entered into a sale and purchase agreement with Panorama Positif Sdn Bhd for the acquisition of a 3.75ha (9.3 acres) piece of freehold industrial land in Mukim Kapar, Klang, which we gather is near to its current cluster of factories.

- The group said the purchase price of RM19.4mil (or RM48psf) was arrived at on a willing-buyer willing-seller basis with the Board making the decision through enquiries and comparing recent land transactions in the area. No valuation was carried out.

- The acquisition, which is to be satisfied wholly by cash, will be funded through a mix of internal funds and bank borrowings, with the exact combination to be determined at a later date. Kossan has a strong balance sheet, with net gearing of only 0.1x as at end Sept 2013. We understand that the acquisition is expected to be completed in 1QFY14.

- We view Kossan’s latest landbanking move positively as it is line with the group’s strategy to continuously replenish its landbank to generate long-term sustainable income and to be “prepared for tomorrow”. We do not yet know of group’s plan for the land but based on our assumption of 6.4 acres per factory, the land is good for the construction of one nitrile plant that may contribute up to 2bil pcs p.a.

- This is the group’s second land purchase this year following its acquisition of a 23 ha (56 acres) land in Batang Berjuntai back in February. Kossan plans to build 6-8 high productivity plants there to achieve an installed capacity of 32 bil pcs p.a. by 2018 (5 year CAGR of 15%) as part of its medium-term growth plans.

No change to our forecasts for now as we lack details to quantify its enhancement to earnings. We believe this latest development would provide further bounce to the group’s share price, which has surged 119% YTD. 

Source: AmeSecurities