• KL Kepong (KLK) announced that it would be subscribing to its portion of Synthomer PLC’s 1-for-4 rights issue at 240 pence/share.

• Synthomer is a chemical company listed on the London Stock Exchange. KLK has a 19.68% stake in Synthomer. KLK has held shares in Synthomer for years.

• The cost of subscription will cost KLK about £40.13mil or RM207.9mil. KLK is not expected to face problems subscribing to the rights as its gross cash stood at RM1.47bil as at endSept 2018.

• KLK is also sub-underwritng a portion of the new rights issue shares of up to a maximum of 8.3mil shares. If KLK has to underwrite the new rights shares, KLK’s shareholding in Synthomer would increase to 21.64%.

• We do not expect significant earnings contribution from Synthomer. As this is an investment stake (based on a 19.68% stake and not 21.64%), KLK enjoys only dividend cash flows from Synthomer.

• If KLK’s stake increases to 21.64%, we think that KLK would be able to record share of net profit in Synthomer.

• According to Bloomberg, Synthomer’s dividend yields are forecast at 3.84% for FYE12/19F and 4.06% for FYE12/20F. Synthomer paid a gross DPS of 13.1 pence in FYE12/18.

• Based on KLK’s shareholding of 66.9mil shares in Synthomer, we estimate that KLK received dividends of RM45.2mil from Synthomer in FYE12/18.

• Maintain SELL on KLK with a fair value of RM23.12/share.

Source: AmInvest Research - 12 Jul 2019