Stock Name: KLK
Company Name: KUALA LUMPUR KEPONG BHD
Research House: MIDF

Kuala Lumpur Kepong Bhd
(Dec 15, RM21.36)
Maintain buy at RM20.98 with target price of RM24.02: Yule Catto, in which KLK is a substantial shareholder with 18.82% equity interest, has announced its acquisition of PolymerLatex Group (Europe's third largest latex producer) for about ''376 million (RM1.86 billion). PolymerLatex is owned by TowerBrook, which has built a '60 million plant in Pasir Gudang, Johor, and a new R&D facility near Dusseldorf.

We view the acquisition positively as it will pave way for Yule Catto to further expand into the latex market for the paint, construction, carpeting and adhesive industries. In addition, the acquisition will strengthen its position in Europe and Malaysia in the latex-coated paper market. It will also add value to the nitrile latex market in Malaysia.

The'' acquisition will be financed via a rights issue and bank borrowings. Yule Catto will issue a 4:3 rights issue to raise ''225 million at 116 pence per share, with KLKI to subscribe in full. Upon subscription, KLK will'' acquire an additional 36.55 million new shares that will result in total shares of 63.96 million. It is believed that KLK will use RM209 million of internal funds to purchase the 36.55 million new shares, which we feel will not be a strain given its cash position of RM1.3 billion.

We reiterate our 'buy' recommendation with a target price of RM24.02 based on a price-earnings ratio of 23 times and earnings per share in 2011 of 104.4 sen. ' MIDF Research, Dec 15


This article appeared in The Edge Financial Daily, December 16, 2010.