News

• Kossan Rubber Industries announced on the 30 th of August that its wholly owned subsidiary, Ideal Quality Sdn Bhd, had entered into a sale and purchase agreement with Andalas Development Sdn Bhd for the acquisition of a vacant piece of industrial land measuring 4.27m sqft or 396,336 square meters (c. 98 acres) located in Kuala Langat, Selangor.

Comments

• Purchase consideration. The total consideration for the said land is RM95.98m to be satisfied in cash. The purchase consideration, equating to RM22.50 per sqft was arrived at after taking into consideration of recent transactions within the vicinity.

• Purpose. The rationale of the acquisition is for the future development of the group’s manufacturing activities on the said piece of land. We do not expect the group to undertake the development within FY17 as such we are neutral on this announcement.

• Net Gearing . As at 1H17 Kossan had a net gearing of 0.09x and a cash balance of RM179.7m. As such the group is able to easily satisfy the acquisition. Our pro-forma calculation implies that net gearing would increase to 0.18x post acquisition should the group drawdown on its cash balance.

• Dividends. The group paid a dividend of 11 sen a share in FY16. We are of the opinion that the acquisition would not affect Kossan’s ability to pay dividends on the back of the group’s strong operating cash flow generation. We project 10 sen a share in dividends in FY17.

• To note, as at FY16, Kossan had 84 acres of strategic land bank (all industrial land ready to be developed) for its future expansion. This acquisition will increase its land bank by 98 acres to 182 acres of industrial land.

• The land is strategically located in the vicinity of a major industrial complex and possesses excellent accessibility and connectivity via major highways. To note, the group plans to double its capacity by 2023 from c. 22bn pieces per annum in FY16 to c.44bn pieces of gloves by 2023. This acquisition is inline with Kossans overall long-term growth strategy.

Risks

• Surge in nitrile and latex prices, spike in chemical prices, and depreciation of USD vs. MYR.

Rating

HOLD ( ↔ )

• We like Kossan for its management’s extensive engineering experience and continuous investment in R&D/automation. However we believe that the stock is fully priced in at this juncture. Maintain HOLD.

Valuation

• Maintain TP of RM7.10 based on P/E multiple of 16.9x FY18 EPS, in line with its 5 year historical average (Figure #1).

Source: Hong Leong Investment Bank Research - 5 Sept 2017