Kossan has proposed to divest a piece of surplus land for a cash consideration of RM147.8m making a gain of RM35.4m. BUY with a TP of RM5.25 based on 25.5x FY20E EPS. Kossan 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%.

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.

Looking ahead, Plant 16 and Plant 17 which were fully commissioned in Aug 2018 and end 2018 are expected to anchor subsequent quarters’ earnings. Plant 18 (2.5bn pieces) has commenced operations with six lines currently commissioned and the remaining two expected to be fully commissioned by end Nov 2018. Plant 19 (3.0bn 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 32bn pieces (+28%) per annum. Looking ahead, the group expect construction of the Bidor plant to take eight years to complete, costing RM1.5bn. The expected capacity at the Bidor plant is estimated at 34bn pieces per annum, which will more than double the 32bn pieces currently.

Source: Rakuten Research - 17 Jan 2020