In an announcement to Bursa Malaysia, Kossan has proposed to divest a piece of surplus land for a cash consideration of RM147.8m. We are positive on this considering that the huge land acreage in Bidor is more than sufficient to keep the group busy with capacity expansion over the next several years. The gain from disposal is RM35.4m and expected to be completed by 1Q 2021. TP is RM5.25 based on 25.5x FY20E EPS (+1.0SD above 5-year historical forward mean). Maintain OP.

Selling Kuala Langat land for RM147.8m, and register a gain of RM34.5m (3.0 sen/share). In an announcement to Bursa Malaysia, Kossan has proposed to divest a piece of industrial land measuring 4.2m sq ft in Kuala Langat for a cash consideration of RM147.8m. We are positive on this latest development by Kossan considering that the huge land acreage in Bidor is more than sufficient for the expansion for its gloves production lines which is expected to keep the group busy over the next several years. Hence, the Kuala Langat land sale is deemed as surplus to requirement following acquisition of the Bidor land back in 2018. Recall, Kossan in 2018 has purchased two pieces of leasehold land measuring approximately total of 824.1 acres located in Bidor, Perak, for cash consideration of RM82.4m. The proceeds can be ploughed back into the next phase of expansion in Bidor. The gain from disposal is RM35.4m which is expected to be completed by 1Q 2021. For illustrative purposes, the RM147.8m proceeds will reduce Kossan’s net gearing from 0.29x as at 30 Sept 2019 to 0.19x and the gain of RM35.4m raise Kossan’s book-value per share from RM1.09 as at 30 Sept 2019 to RM1.12. We keep our FY19E/FY20E earnings forecasts unchanged for now.

Plant 17, 18 and 19 to boost earnings over next two years. Looking ahead, Plant 16 and Plant 17 which was fully commissioned in Aug 2018 and end 2018 are expected to anchor subsequent quarters’ earnings. Plant 18 (2.5b pieces) has commenced operations with six lines currently commissioned and the remaining two expected to be fully commissioned by end Nov 2018. Plant 19 (3.0b pieces) is currently on track, with expected full commissioning latest by 1HCY20. Upon completion, these three new plants will bring the group’s total installed capacity to 32b pieces (+28%) of gloves per annum. Looking ahead, the group expects construction of the Bidor plant to take eight years to complete, costing RM1.5b (works out to RM190m capex per annum) for an integrated glove manufacturing project, subject to all relevant approvals being obtained. The expected capacity at the Bidor plant is estimated at 34b pieces per annum, which will more than doubled from 32b pieces currently (once Plant 18 and Plant 19 are fully commissioned).

Stock under-appreciated with unwarranted PER discount valuation to peers, maintain Outperform. We maintain our FY19E/FY20E earnings forecasts. Our TP of RM5.25 is based on 25.5x FY20E EPS (+1.0SD above 5-year historical forward mean). We like Kossan reiterating the fact that it is trading at an unwarranted 25% discount to peers’ PER average considering that its prospective net profit growth is the highest at 14% compared to peers’ average of 7%. Reiterate Outperform.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 17 Jan 2020