Kossan  Rubber  Industries  (KRI)  announced  yesterday  that  it  has acquired  a  9.26-acre  land  in  Selangor,  in  line  with  its  capacity expansion  strategy.  We  view  the  acquisition  positively  as  this  would help boost  KRI’s production  capacity  and  earnings in the near future. Maintain BUY,  with our FV lifted to MYR4.13 (from MYR3.78),  pegged to a higher 15.3x FY14 P/E.

• Details  on  the  land.  KRI  announced  yesterday  that  its  wholly-owned subsidiary, Ideal Quality SB (IQ), has entered into a sales and purchase agreement with Panaroma Positif SB (PP) to acquire a 9.26-acre piece of  freehold  industrial  land  in  Klang,  Selangor,  for  a  total  cash consideration of MYR19.4m.
• Landbank  for  the  future.  We  understand  that  KRI’s  newly-acquired land  is  earmarked  for  its  capacity  expansion  of  5.0-6.0bn  pieces  of gloves  per  annum,  with  the  addition  of  20  new  production  lines.  We believe the acquisition is in line with  the company’s capacity expansion strategy, as it plans to ramp  up  its  nitrile glove  production capacity from 22.0bn (by May 2014) to 28.0bn pieces by 2015. We view the acquisition positively as this would help  boost  KRI’s production  and  earnings in the near future.
• Funding  will not be an issue.  With the proposed acquisition  expected to be completed by 1QFY14, the exact  proportion  of funding  has  yet to be  determined.  We  understand  that  the  purchase  will  be  funded internally as well as through borrowings. We believe  that  funding would not be an issue as KRI  had  MYR87.9m of cash  with total borrowings of MYR160.9m  as at 3QFY13,  which translate  into a low net gearing ratio of 0.11x.
• Maintain BUY. All in all, we remain upbeat on KRI’s healthy expansion strategy,  which  should  improve  the group’s earnings in the foreseeable future.  Maintain BUY on the stock,  with our FV lifted to MYR4.13 (from MYR3.78),  pegged  to  a  higher  target  15.3x  (from  14.0x)  FY14  P/E, based on  its  12-month historical average P/E which is still at  a 12-  25% discount to peers despite its stronger earnings growth prospects.

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Source: RHB