This article first appeared in The Edge Financial Daily on January 20, 2020

Kossan Rubber Industries Bhd
(Jan 17, RM4.20)
Maintain buy with an unchanged target price (TP) of RM4.93: Kossan Rubber Industries Bhd entered into a sale and purchase agreement (SPA) with Liansheng Paper (M) Sdn Bhd for the disposal of a vacant freehold 390,397 sq m industrial land for a total cash consideration of RM147.75 million.

Upon the disposal’s completion, estimated by the first quarter of 2021, Kossan expects a net gain of approximately RM35.4 million. The disposal’s proceeds are intended for working capital purposes and to hasten the development of its Bidor plant in Perak.

The consideration of RM35.2 per sq ft is fair, considering an independent valuer’s valuation of RM34.5 per sq ft. Kossan acquired the parcel for RM96 million or RM22.50 per sq ft in 2017 — this will result in a net disposal gain of RM35.4 million. Assuming the deal materialises, we estimate an increase of 2.8 sen per share to Kossan’s reported earnings per share (EPS) for the financial year ending Dec 31, 2020 (FY20).

Overall, we opined that the disposal will bode positively for the group’s growth prospects and direction. Kossan’s 824-acre (333.46ha) land in Bidor is more than sufficient to fuel its long-term growth plan. The Bidor plant will be the group’s new base, featuring integrated and modernised glove manufacturing facilities. The Bidor project is expected to take about eight years to complete, providing an additional output of up to 45 billion gloves per annum. The first plant — with about four billion gloves per annum — is expected to be completed in 2022.

Our earnings estimates are unchanged pending the SPA’s completion. Our “buy” call and TP are maintained at RM4.93 per share, pegged at an unchanged price-earnings multiple of 24 times against 2020 EPS. We like the stock for its earnings growth visibility and defensive nature. — TA Securities, Jan 17