Analysts positive on Kossan’s Selangor land disposal plan

By S BIRRUNTHA

KOSSAN Rubber Industries Bhd’s proposed disposal of a piece of vacant land in Kuala Langat, Selangor, for RM153.38 million is viewed positively by research firms as it would benefit the group’s expansion in Bidor, Perak.

Public Investment Bank Bhd (PIBB) said with the land disposal, Kossan can unlock value and plough back the proceeds to fund the group’s next phase of expansion of its rubber glove manufacturing operations in Bidor, which is expected to centralise all of Kossan’s future expansion.

“Kossan has accelerated its Bidor expansion plan, with its first plant expected to be operational by financial year 2021 (FY21), as opposed to its initial target of FY22.

“In our view, the disposal was timely as the proceeds can be used to satisfy part of the Bidor expansion’s capital expenditure needs,” it said in a research note last Friday.

Kossan acquired 824 acres (333.46 ha) of leasehold land in Bidor for RM82.4 million in March 2018.

“The Kuala Langat land will be sold for a cash consideration of RM153.4 million and Kossan will lock in a gain of RM39 million upon completion of the disposal in the first quarter of 2021 (1Q21).

“We believe the disposal consideration was fair, given the land was valued at a market valuation of RM145 million in January 2020,” it said.

PIBB stated that given the one-off nature of the disposal gain, it will maintain its earnings forecast for Kossan’s FY21 and ‘Outperform’ call with an unchanged target price (TP) of RM6.

PIBB said Kossan’s Plant 18 was fully commissioned in November 2019, while Plant 19 is expected to be fully operational by the first half of 2020.

With more lines coming on stream, PIBB said these two plants will continue to support Kossan’s earnings growth for FY20 forecast (F).

AllianceDBS Research Sdn Bhd added that the monetisation of the land in Kuala Langat is in line with Kossan’s long-term strategy of focusing its future expansion plans in Bidor.

The research house said Kossan is assessing ways to maximise the efficiency of its business operations and reduce the duplication of operating expenses.

AllianceDBS also said Kossan is unlikely to distribute the gains from the proposed Kuala Langat land sale as a special dividend. The land sale is subject to the approval of the Selangor state authorities and is scheduled for completion by 1Q21.

AllianceDBS has a TP of RM5.60, based on 27 times FY20F earnings per share on Kossan.

“We are expecting Kossan’s net profit to grow at a three-year compound annual growth rate of 8.1% over 2018 to 2022.

“On the back of strong demand for rubber gloves, we expect a step-up in earnings in 2Q20 onwards. Stronger than expected margins would be a key catalyst for the stock,” it said.