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Wednesday, February 20, 2013

Kossan acquiring land for expansion


Maintain outperform at RM3.24 with a target price of RM3.64: In an
announcement to Bursa Malaysia, Kossan Rubber Industries said it is
buying a 23ha piece of freehold industrial land in Batang Berjuntai,
Selangor, for RM35.4 million or RM14.50 per sq ft (psf). The acquisition
is expected to be completed by the first quarter of financial year 2014

This acquisition makes sense to us and is in line with Kossan’s strategy
to replenish its landbank in order to build more production lines for
gloves, which are presently running at full capacity.

We believe the price is fair after checking with several sources and
finding that industrial land prices in the Batang Berjuntai area are
RM13 to RM16 psf.

Considering the strong demand for nitrile gloves, the land is highly
likely to be used to house plants for the production of nitrile gloves.
Note that Kossan’s recent new nitrile capacity of 1.3 billion pieces of
gloves has been mostly taken up by confirmed buyers.

For illustrative purposes, the RM35.4 million acquisition will not have
a material impact on Kossan’s net debt and net gearing of RM84 million
and 0.2 times as at Sept 30, 2012.

We do not have sufficient details and numbers to quantify future
enhancement to our earnings forecasts at this juncture.

Kossan’s commercial operation of its nine-line production plant, which
produces 1.3 billion nitrile gloves per year  in total, hit maximum
capacity in 4QFY12. Its production line to produce 600 million pieces of
surgical gloves, meanwhile, is expected to be ready by the end of this
month. We expect a 4QFY12 net profit of between RM29 million and RM31
million, bringing the FY12 profit to RM104 million to RM106 million,
underpinned by new capacity and lower than expected input latex prices.
We make no changes to our forecasts.

Kossan is trading at nine times FY13 earnings compared with Top Glove
Corp Bhd and Supermax Corp Bhd, which are at 15 times their FY13 earnings.

The valuation gap should narrow as:

(i) Kossan moves up the value chain by offering higher margin surgical
and clean room gloves; and
(ii) the fact that Kossan’s product mix contains less natural rubber
gloves, which are more sensitive to the movement in latex prices.

Going by the recent acquisitions of ADVENTA BHD [] and LATEXX PARTNERS
BHD [] at price-earnings ratios (PER) of between 13 and 16 times, Kossan
appears more attractive at its current valuations because Kossan has a
bigger market capitalisation and earnings base than both Adventa and
Latexx Partners.

Our target price is based on a PER of 10 times, representing a -0.5
standard deviation below its six-year average over our FY13 earnings per
share forecast of 36.4 sen.

Risks include higher than expected input raw material cost and lower
than expected volume sales. —/Kenanga Research,Feb 19/

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

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