- Kuala Lumpur Kepong Bhd (KLK) has proposed to dispose a 20% equity interest in KLK Premier Capital Ltd to Mitsui & Co for US$44mil or RM154mil. KLK Premier Capital owns 100% of Taiko Palm-Oleo (Zhangjiagang) Co Ltd.

- Taiko Palm-Oleo is involved in the manufacturing and trading of fatty acids and glycerine in China.

- We view the proposed disposal positively as KLK would be able to leverage on Mitsui’s expertise and distribution network. The proposed disposal would also reduce KLK’s oleochemical exposure. Taiko Palm-Oleo is breaking even currently.

- According to the Bursa Announcement, Mitsui would be assisting in the transfer of technology and sale of Taiko’s oleochemical products to Japanese companies operating in China.

- Prior to the disposal, KLK would be injecting US$50.3mil (RM176.1mil) into Taiko Palm-Oleo to expand its capacity and product range. We estimate Taiko Palm-Oleo’s current production capacity at 157,000 tonnes to 200,000 tonnes per year.

- We believe that the selling price of US$44mil for a 20% stake is fair. Taiko Palm-Oleo recorded a net profit of US$1.1mil in FY14. The proposed disposal is expected to be completed in 1Q2015.

- Apart from Taiko Palm-Oleo, KLK has another oleochemical unit in China called Shanghai Jinshan Jingwei Chemical Co Ltd.

- Shanghai Jinshan produces specialty oleochemicals. Shanghai Jinshan’s production capacity is estimated at 30,000 tonnes per year.

- Overall, KLK’s China operations do not contribute significantly to the group’s oleochemical earnings. We believe that bulk of the contribution come from KLK’s Malaysia operations.

- Maintain HOLD on KLK with an unchanged fair value of RM23.90/share.

Source: AmeSecurities