Thursday August 9, 2012
CIMB Research expresses reservation over Kossan Rubber’s upstream plan
“We view Kossan’s plans negatively although they did not come as a total surprise as management had hinted at landbank acquisitions previously.
“We believe glovemakers should focus on manufacturing, distribution and brand development, not the management of plantation estates. Also, the use of derivative instruments would be a less capital-intensive method to hedge costs,” it said in a client note.
Using Top Glove Corp Bhd as a benchmark, the brokerage explained that Kossan might have to spend some RM7mil to buy land and a further RM130mil over eight years to develop it, which worked out to RM16mil per annum or RM13,000 per ha.
CIMB Research added that any impact from the proposed land purchase would be felt only after eight years as the trees start to yield in the eighth year after plantation.
Kossan managing director Datuk Lim Kuang Sia told a local daily yesterday that it was on the lookout for 10,000ha of plantation land either in Indonesia or Myanmar.
He said this would serve as a natural hedge against the volatility of rubber prices and provide sufficient supply in the event of a shortage.
Top Glove, the world’s biggest glovemaker, made a similar move in June when it bought 30,000ha of greenfield plantation land in Indonesia.
It had signed a share purchase agreement for a 95% stake in PT Agro Pratama Sejahtera, which has a 60-year licence to operate a rubber forest plantation on two islands east of Palembang city, costing RM22mil.
According to CIMB Research, Top Glove expects to pour in RM400mil over eight years to clear and fully cultivate its estate.
Other analysts are more sanguine on Kossan’s proposed foray into plantations, with several agreeing it was an effective way to counter the unanticipated and negative price shocks that are typical of commodities.
Alliance Research analyst Ian Wan said the choice to go upstream was preferable as “you can’t perfectly hedge your position with futures”, adding the benefits would be reaped in the longer-term.
An analyst from RHB Research Institute said that the current declining price of rubber would open the door to cheaper land acquisition opportunities, while Kossan’s burgeoning demand for rubber from its technical rubber products division would strengthen and secure future supply from the plantation.
“The key is the price of the land and development cost, all of which have yet to be determined,” an industry observer pointed out.
As at end-March, Kossan had cash and bank balances of RM44.16mil versus short-term and bank loan borrowings of RM107.89mil.
Rubber has slumped to its lowest in three years on slower demand amidst a shuddering global economy, Bloomberg reported. Futures contracts have sunk 17% for the year.
Kossan closed one sen lower to RM3.12, with 245,000 shares traded.