PublicInvest Research

Kuala Lumpur Kepong - Eyeing Bigger Stake in Synthomer?

Publish date: Mon, 07 Nov 2022, 10:07 AM
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According to a Reuters news report, Kuala Lumpur Kepong (KLK) is considering boosting its stake in London-listed chemicals company, Synthomer Plc after seeing the company’s share price drop more than 70% YTD. However, it remains unclear as to whether it will acquire a controlling stake. Given weakness in Synthomer’s share price and favourable currency movement, we think it may be an opportune time for KLK to relook at its investments given its solid balance sheet. Meanwhile, the Group’s 4QFY22 results are expected to be released on 23 Nov. Pending the results release, we maintain our Neutral call with an unchanged TP of RM25.62.

  • In the midst of negotiation. It is believed that KLK is currently talking with at least one financial adviser to explore potentially boosting its 26.3% stake in Synthomer. The stake purchase could comprise primary (private placement) and secondary (from another existing shareholders) shares. However, it remains unclear whether it will acquire a controlling stake.
  • Shareholding structure in Synthomer. KLK is the largest shareholder of Synthomer, which has a market capitalization of GBP577.6m (RM3.1bn). The second largest shareholder is UBS Asset Management with a 5% stake followed by M&G Investment Management with 4.99%. The London-listed company contributed equity-accounted profit totaling RM260.6m or 15.5% to Group earnings in FY21. However, it contributed only RM30.2m to the Group in the first 9 months of FY22. A larger stake could further expand KLK’s earnings from contributions through its specialty chemicals business. Synthomer has been expanding aggressively with the aim of becoming a leading global producer of polymers. Last year, it acquired US-based Eastman Chemical Company, in the business of adhesive resin, for USD1bn (RM4.7bn).
  • Solid balance sheet. As of 9MFY22, KLK has a cash pile of RM3.4bn with a healthy net gearing of 0.46x. In view of the current CPO price performance, its operating cash flows are expected to remain steady for the next 2 quarters.
  • Synthomer in the doldrums. Following the easing on concerns over COVID-19, Synthomer saw its 1HFY22 pre-tax earnings drop from £272.4m to £114.7m though revenue was up 8.6% to £1.33bn as demand for nitrile butadiene rubber related products weakened in line with the bearish outlook for rubber glove. Synthomer’s current net gearing stands at 87.5%, suggesting that it may be somewhat cash strapped. The company’s Board has suspended dividend payments until the end of 2023, including the payment that is due this Nov.

Source: PublicInvest Research - 7 Nov 2022

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