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Friday, April 3, 2020

Kossan Rubber Industries Berhad - Divesting Vacant Freehold Land

Kossan made an announcement pertaining to the disposal of a piece of vacant land in Kuala Langat for a cash consideration of RM153.4m. Upon completion of the disposal, which is targeted to be in 1QFY21, Kossan will register a net gain on disposal of RM39m. We view the disposal positively as Kossan would be able to unlock the value of the vacant land and reinvest the proceeds into its Bidor expansion. Given the one-off nature of the disposal gain, we maintain our earnings forecast for FY21F. Our Outperform call on Kossan is maintained, with an unchanged TP of RM6.00.
  • Disposing vacant land. Kossan announced that it has entered into a conditional sales and purchase agreement with Best Eternity Recycle Technology SB (BERT), for the disposal of a piece of vacant industrial land located in Kuala Langat, measuring 390.4sqm. The land will be sold for a cash consideration of RM153.4m and Kossan will lock in a gain of RM39m upon completion of the disposal, which is expected to be in 1QFY21. We believe the disposal consideration was fair, given that the piece of land was valued at a market valuation of RM145m in January 2020.
  • View on the disposal. We view this development positively as it enables Kossan to unlock the value of the vacant land and the proceeds received can be ploughed back to fund for the Group’s next phase of expansion in Bidor. Recall that Kossan had acquired two plots of leasehold land in Bidor, with a total size of 824.1 acres, for a purchase consideration of RM82.4m back in March 2018. The Bidor site will house and centralise all of Kossan’s future expansion. Note that Kossan has accelerated its Bidor expansion plan, with its first plant expected to be operational by FY21F, as opposed to its initial target of FY22F. In our view, the disposal was timely as the proceeds can be used to satisfy part of the Bidor expansion’s capital expenditure needs.
  • Plant 18, Plant 19 and beyond. Plant 18 (+2.5bn pc pa) has been fully commissioned in November 2019, while Plant 19 (+3.0bn pcs pa) is expected to be fully operational by 1HFY20. With more lines coming on stream, these two plants will continue to support the Group’s earnings growth for FY20F. Upon completion, Kossan’s total installed capacity should reach 32.5bn pcs pa. As for the Bidor expansion, management has previously guided that it will take c.8 years to complete and capacity would double to c.65bn pcs pa once it is fully commissioned.
Source: PublicInvest Research - 3 Apr 2020

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