Kossan Rubber Industries - Acquiring land for expansion

News   In an announcement to Bursa Malaysia, Kossan Rubber Industries (Kossan) said it is buying a piece of freehold industrial land measuring approximately 56 acres located in Batang Berjuntai, Kuala Selangor for RM35.4m or RM14.50 per sq feet.  

 The acquisition is expected to be completed by 1QFY2014.

 

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

 We believe the land acquisition price is fair after checking with several sources that the industrial land prices in the vicinity of Batang Berjuntai are between RM13 to RM16 per sq feet.  

 Amplifying 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 1.3b pieces of gloves has been mostly taken up by confirmed buyers. 

 For illustrative purposes, the RM35.4m acquisition will not have a material impact on Kossan’s net debt and net gearing of RM84m and 0.2x as at 30 Sept 2012.

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

 

Outlook  4QFY12 results preview.  Kossan’s commercial operation of its nine-line production plant, which produces 1.3b nitrile gloves p.a. in total, has hit maximum capacity in 4Q2012. Its production line to produce 0.6b pieces of surgical gloves meanwhile is expected to be ready by end-Feb 2013. We expect a 4QFY12 net profit of between RM29.0m and 31.0m, bringing the full-year FY12 profit to RM104.0mRM106.0m, underpinned by new capacity and lowerthan-expected input latex prices.

 

Forecast  No changes to our forecasts.

 

Rating     Maintain OUTPERFORM

 

Valuation   Kossan is trading at 9.0x FY13 earnings compared to Topglove and Supermax, which are at 15.0x 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 lesser natural rubber glove, which is more sensitive to the movement in latex prices. Going by the recent acquisition of both Adventa and Latexx Partner at PERs of between 13.0x and 16.0x, Kossan appears more attractive at its current valuations. This is because Kossan has a bigger market capitalisation and earnings base compared with both Adventa and Latexx Partner. Our TP is based on a PER of 10.0x, representing a -0.5 standard deviation below its 6-year average, over our FY13 EPS forecast of 36.4 sen.

  

Risks  Higher than expected input raw material cost  

Lower than expected volume sales.

Source: Kenanga