• KL Kepong (KLK) has proposed to subscribe to 9.1mil of Synthomer PLC’s share placement of 42.5mil shares, at £4.85/share. The cost of the subscription will be £43.98mil or RM251.1mil.

• KLK will finance the cost of the subscription with internal funds and bank borrowings. KLK’s gross cash stood at RM3.9bil as at end-September 2020. Net gearing was 23.5%.

• After Synthomer’s share placement, KLK’s shareholding will remain unchanged at 21.3%.

• Synthomer is carrying out a placement of up to 10% of its issued share capital to raise funds for its acquisition of Eastman Chemical Company’s adhesive resin business.

• The acquisition cost of US$1.0bil will be financed via internal cash, a term loan of US$300.0mil and proceeds from a share placement. Synthomer’s share placement is expected to raise proceeds of £200mil or RM1.14bil.

• The adhesive resin unit of Eastman Chemical Company develops, manufactures and sells tackifying resin and additives for adhesive products in industries such as hygiene and packaging.

• We are neutral on KLK’s subscription of 9.1mil shares in Synthomer. KLK’s equity interest in Synthomer will remain unchanged after Synthomer’s share placement and hence, there will not be any impact on KLK’s earnings.

• Currently, Synthomer’s earnings contribution is recognised under KLK’s share of net profit in associates. Share of net profit in associates accounted for 4.8% of KL’s core net profit of RM585.3mil in 1HFYE9/21.

• Synthomer’s core pre-tax profit jumped to £272.4mil in 1HFYE12/21 from £58.4mil in 1HFYE12/20 on the back of strong demand and selling prices for its chemical products, which are used by glove manufacturers.

• We maintain HOLD on KLK with a fair value of RM22.22/share.

Source: AmInvest Research - 1 Nov 2021