Highlights

• KLK entered into a conditional asset purchase agreement to acquire Emery’s plant, tangible assets and inventories directly associate with the oleochemical business at Emery’s oleochemical site in Germany for €40.5m (or RM162m).

• Emery is a JV unit of Sime Darby and PTT Chemical International Private Ltd.

• The acquisition of the production know-how and brand name of Triacetin products is aimed at boosting its worldwide presence for the fatty acids and glycerine business, as well as the ability to diversify into the tallowbased market.

• The proposed acquisition is expected to complete in 3Q15.

Impact

• While latest move allows KLK to enhance its worldwide presence for the downstream segment, we believe earnings impact will likely be minimal, given KLK’s large earnings base.

• KLK will not have issue funding the acquisition, as it will only raise its net gearing by about 9% to 0.23x. 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) 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 RM20.17 (see Figure 1) and HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 28 May 2015