KLK announced that it is exercising its entire rights entitlement arising from Synthomer Plc’s (which KLK has a 19.7% stake) fund raising exercise to fund its acquisition of OMNOVA Solutions, a move to expand its global position as a major specialty chemicals company. Upon subscription of its rights shares entitlements, KLK will acquire 16.7m new Synthomer shares (or 19.7% of the new shares) to be issued under the rights issue for £40.1m (or RM207.9m). The latest move has minimal impact to KLK’s balance sheet, given its sizeable war chest. Maintain earnings forecasts, SOP-derived TP of RM24.79 and HOLD rating on the stock.

NEWSBREAK

KLK announced that it is exercising its entire rights entitlement arising from Synthomer Plc’s (which KLK has a 19.7% stake) fund raising exercise to acquire OMNOVA Solutions Inc (a listed US chemicals company, which produces polymers, dispersions, elastomers and other specialty chemical products).

Upon subscription of its rights shares entitlements, KLK will acquire 16.7m new Synthomer shares (or 19.7% of the new shares) to be issued under the rights issue for £40.1m (or RM207.9m), which will be financed by its existing cash reserves and bank borrowings. In addition, KLK is sub-underwriting a portion of the new rights issue shares (up to a maximum of 8.3m shares). In the event KLK is called upon to subscribe for the remaining new shares, KLK’s shareholding may increase up to 21.6%, hence making Synthomer an associate of KLK.

In the same announcement, management shared that Synthomer’s latest acquisition represents a good opportunity for it to strengthen its global position as a major specialty chemicals company, which will be beneficial to Synthomer, and hence KLK (through its stake in Synthomer).

HLIB’s VIEW

Impact on balance sheet. Insignificant impact to KLK given its sizeable war chest. Based on our estimates, the latest move will raise KLK’s net debt and net gearing to RM2.9bn and 0.25x (form RM2.7bn and 0.23x as at 31 Mar 2019), assuming KLK only subscribes its rights shares entitlements.

Forecast. Maintain, pending further details with management.

Maintain HOLD, TP: RM24.79. We maintain our HOLD rating on KLK, with unchanged SOP-derived TP of RM24.79.

Source: Hong Leong Investment Bank Research - 12 Jul 2019