- Kuala Lumpur Kepong Bhd (KLK) has proposed to acquire Emery Oleochemicals GMBH’s assets and business in Dusseldorf, Germany for 40.5mil Euros or RM162mil. Emery is 50%- owned by Sime Darby Plantation Sdn Bhd. The proposed acquisition is expected to be completed in 3Q2015.

- Apart from Europe, Emery Oleochemicals also has operations in Malaysia and the US. It appears that Emery is only selling its operations in Europe to KLK.

- We are unsure if the Europe unit of Emery is profitable as this was not disclosed in the announcement. Hence, we are unable to ascertain if the purchase consideration of RM162mil is reasonable. From a replacement cost perspective, the purchase consideration of RM162mil translates into RM648/tonne. This is cheaper than KLK’s acquisition of Uniqema GmBH (or KLK Emmerich) for RM1,694/tonne in 2010.

- Emery recorded a net loss of RM47.6mil in FYE6/14. This was inclusive of its operations in Malaysia, the US and Europe. In 9MFYE6/15, Sime Darby’s share of losses in joint ventures, which include Emery, Battersea, and Ramsay Sime Darby Healthcare, was RM127.9mil. Battersea accounted for almost 60% of the losses in Sime Darby’s joint ventures in FYE6/14.

- Assuming half of Emery’s net loss of RM47.6mil in FY14 came from the Europe unit, this would reduce KLK’s FY16F EPS by 2%. We reckon that KLK would be able to integrate Emery’s operations together with its fatty acids unit in Emmerich, Germany. Apart from Germany, KLK also has oleochemical operations in Netherlands, Switzerland, and Belgium.

- We believe that KLK is one of the biggest players in the oleochemical market in Europe, with an estimated production capacity of more than 400,000 tonnes per year. After the acquisition of Emery’s European unit, KLK’s oleochemical capacity in Europe would rise by 250,000 tonnes to more than 650,000 tonnes per year.

- Emery has been looking for a buyer for its European unit since April 2015 due to challenging operating conditions. Emery has been facing fierce competition from the Indonesian players, which are also involved in the upstream business. Emery’s CEO was quoted as saying that as the Indonesian companies are integrated, they were able to introduce irrational pricing, which resulted in volatility in the oleochemical market. He also said that the Emery plant in Europe would benefit the company, which is integrated and use it as a swing plant. Maintain BUY on KLK with an unchanged fair value of RM25.10/share.

Source: AmeSecurities Research - 28 May 2015