Highlights

KLK entered into a sale and purchase agreement with GRI Group Ltd and three other sellers for the acquisition of TensaChem SA for €16.2m (or RM70.4m).

TensaChem, which is incorporated in Belgium, is a surfactants supplier of the personal care and homecare sectors, with manufacturing of alcohol ether sulphates, alcohol suphates and sulphonic acids (comprising ~96% of its business).

The proposed acquisition is expected to complete by Oct 2014.

Pros/Cons

In terms of balance sheet… KLK will not have issue funding the acquisition, as it would only raise KLK’s net debt and net gearing from RM1.36bn and 0.17x (as at end- Mar) to RM1.43bn and 0.18x, respectively.

Earnings impact will likely be minimal… No mention on the acquired company’s earnings. However, we believe the impact on KLK’s earnings will likely be insignificant, given KLK’s large earnings base (core net profit of RM894m in FY09/13).

Nevertheless, the acquisition of TensaChem will result in positive synergies for KLK’s oleochemical operations in Europe and extend the value chain of its oleochemical business.

Earnings Forecasts

Maintain, pending results announcement on 20 Aug 2014.

Risks

• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD

Negatives – (1) Illiquid trading volume; and (2) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO.

Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Stable property earnings for the next two years.

Valuation

Maintain SOP-derived TP of RM23.12 (see Figure 1) and HOLD recommendation on the stock.

Source:Hong Leong Investment Bank Research - 12 Aug 2014