Highlights

• KLK proposed to acquire Elementis Special Ties Netherlands B.V. (ESN) for an enterprise value of €39m (RM187.2m).

• ESN is a unit of Elementis plc (Eplc, a global specialty chemicals company and listed on the London Stock Exchange) and is involved in the surfactants business in Delden, The Netherlands. Its Delden plant manufactures all of Eplc’s products for its surfactants division and a range of products sold by its specialty products division.

• Based on our understanding from Eplc’s financial information, the surfactant business generated an adjusted operating profit of $9.1m in 1H17 (from an adjusted operating loss of $0.2m a year ago), on the back of favourable pricing conditions.

• The proposed acquisition is expected to be completed in 1HCY18. The Delden site will continue to supply a range of specialty chemicals to Elementis Specialties Inc under a long term supply agreement.

Comments

• Immaterial impact on KLK’s earnings… Given its large earnings base relative to ESN’s earnings. Nevertheless, such move will expand KLK’s business portfolio in terms of product range and market coverage. Also, the use of the Delden site as another hub for KLK’s market penetration strategy will further accelerate growth at its downstream chemical specialties business in Europe.

Earnings Forecasts

• Maintain for now, pending completion of the acquisition. In any case, impact will likely be immaterial given KLK’s existing large earnings base.

Risks

• Weaker-than-expected FFB production and OER;

• A sharp increase in production cost; and

• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD ( ↔ )

• While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations and weak property sentiment (which will in turn drag its overall performance).

Valuation

• Maintain SOP-derived TP of RM24.18 (see Figure 1) and HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 13 Dec 2017