• KLK announced its intention to acquire the entire interest in Elementis Specialities Netherlands B.V. (ESN) comprising 3,404 ordinary shares from Elementis B.V for a cash consideration of EUR 39m (RM187.2m).

• The proposed acquisition will be done via its wholly-owned subsidiary, Kolb Distribution AG which is subject to ESN’s completion of employee consultation processes, receipt of regulatory clearances and other customary conditions.

• We are positive with the proposed acquisition.

• Maintain HOLD recommendation with TP of RM26.46 based on PER of 23x and FY18 EPS.

Details of the proposed acquisition

KLK, through its wholly-owned subsidiary, Kolb Distribution AG proposed to acquire from Elementis B.V. its entire interest in ESN together with its surfactant chemicals assets and business in Delden. The acquisition price is based on an enterprise value of EUR 39m (RM187.2m), on a cash-free debt-free basis and with a normal level of working capital which may be adjusted on or after completion of the proposed acquisition based on ESN’s working capital and net debt on completion.

The proposed acquisition is expected to be completed in the first half of 2018, subject to the fulfillment of all conditions stated in the Protocol and SPA.

About ESN

Elementis Specialities Netherlands B.V. (ESN) is part of the Elementis plc (“Eplc”) Group of companies – a leading global specialty chemicals company – which was launched in 1998 as a result of the re-organization and strategic focus on specialty chemicals by Harrisons and Crosfiled plc. ESN’s business is in the manufacture of surfactants and its Delden plant manufactures all of Eplc’s products for its surfactants division and a range of products sold by its specialty product division.

ESN comes with a large pool of established customer base and upon completion of the proposed acquisition, the Delden site will continue to supply a range of specialty chemicals to Elementis Specialities Inc. under a long-term supply agreement.

Rationale

We believe the proposed acquisition is in line with KLK’s expansion roadmap to ensure continued growth in downstream business apart from focusing on upstream business by expanding the existing Kolb business portfolio in terms of product range and market coverage as well as to further accelerate growth in the Group’s downstream chemical specialties business in Europe. To recap, KLK’s plantation and manufacturing segments margin in FY17 was 12.1% and 1.4% respectively with 85% profit contributed by plantation segment and 9% by manufacturing segment.

Financial effect

The proposed acquisition is not expected to have any material effects on earnings, EPS, net assets, and gearing of KLK’s in FY18. According to the announcement, the proposed acquisition will be funded by a combination of KLK’s existing cash reserve, and bank borrowing. The cash consideration of RM187.2m is about 12% of KLK’s cash in hand as at Sep 2017. Assuming 50% of the acquisition is funded via borrowing, the groups’ gearing level will remain the same as KLK’s cash and cash equivalent as at Sep 2017 stood at RM1.46bn with borrowing at RM4.44bn. KLK’s net gearing as at end Sep 2017 stood at 25.7%.

Maintain HOLD

We are positive with the deal although not much information is given on the target company. We believe the deal would allow Kolb to leverage on ESN extensive market coverage with large established customer base and hence, contribute positively to the future earnings of KLK group. Nonetheless, we are cautious on the challenges and business prospect of chemical business in Europe as the Group is already exposed to similar product risks via existing chemical operations. We maintain our FY17 and FY18 earnings forecast and TP of RM26.46 based on PER multiple of 23x (KLK’s 5- yrs average PER) and FY18 EPS. Maintain HOLD.

Source: BIMB Securities Research - 13 Dec 2017