Highlights

• KLK has entered into a share purchase agreement to dispose a 20% equity interest in KLKPLC to Mitsui & Co. Ltd for US$44m (or RM154m).

• KLKPLC (a wholly-owned subsidiary of KLK) owns 100% stake in Taiko Palm-Oleo (Zhangjiagang) Co Ltd (TPOZ), which is involved in the business of manufacturing and trading of fatty acids, glycerine, soap noodles and triacetin .

• The proposed disposal is conditional on several terms, amongst others: (1) The injection of US$50.2m by KLK into TPOZ to fund the latter’s plant capacity and product range expansion; (2) The capitalization of an existing KLK shareholder’s loan up to US$9.9m (equivalent to 9.9m shares in KLKPLC) and the subscription by KLK of an additional 1.9m shares in KLKPCL; and (3) Obtaining relevant government approvals.

• Upon completion of the proposed disposal, TPOZ (which will be managed by KLK) will be involved mainly in the manufacturing and sale of oleochemical products, while Mitsui will assist in promoting the sale of TPOZ’s products to Japanese companies operating in China as well as assist in transfer of technology to TPOZ.

Pros/Cons

• Positive, as the latest move allows KLK to enhance itsfoothold in China by leveraging on Mitsui’s network and technology.

Earnings Forecasts

• Maintained, as we believe impact arising from the latest move will likely be minimal, given KLK’s large earnings and asset base.

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) Weakglobal 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 inIndonesia; (2) Healthy balance sheet; and (3) Stable property earnings for the next two years.

Valuation

Maintain SOP-derived TP of RM20.41 and HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 9 Jan 2015