- We maintain our BUY recommendation on Kossan Rubber Industries (Kossan) with an unchanged fair value of RM5.65/share.

- 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 Himpun Menang Sdn Bhd for the acquisition of a 5.3ha (13.2 acres) piece of freehold industrial land in Mukim Kapar, Klang, which we gather is near its current cluster of factories.

- The group said the purchase price of RM39mil (or RM68psf) was arrived at on a willingbuyer willing-seller basis with the Board making the decision through enquiries and comparing recent land transactions in the area. No valuation was carried out.

- We understand that the acquisition 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 2014. The acquisition is expected to be completed on 24 February 2015.

- 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.

- We suppose that the land will be used for the group’s future capacity expansions and based on our assumption of 6.4 acres per plant, two nitrile plants with a total installed capacity of up to 4bil pcs p.a. may be constructed on this recently acquired plot.

- The group’s last land purchase was a year ago, when it bought a 3.75ha land in the same vicinity. It also has a 23ha land in Batang Berjuntai (purchased in February 2013) where it plans to build 6-8 high productivity plants to achieve an installed capacity of 32 bil pcs p.a. by 2017 (5 year CAGR of 15%). This is part of its medium-term growth plans.

- No change to our forecasts for now as we lack details to quantify its enhancement to earnings.

Source: AmeSecurities