CCM received a conditional takeover offer from Batu Kawan (BKB) to acquire its 56.32% equity interest from PNB at a proposed cash offer price of RM3.10 per ordinary share amounting to RM292.8m. Once the proposed acquisition becomes unconditional, BKB will be obliged to extend the proposed offer at a cash offer price of RM3.10 per share to other shareholders. We believe that this is a very generous offer as the price of RM3.10 far exceeds our previous target price of RM1.47. We advise investors to ACCEPT the offer.

NEWSBREAK

BKB to acquire CCM stake from PNB. BKB (the holding company of KLK) has entered into a conditional SPA with PNB to acquire a 56.32% equity interest in CCM for a total cash consideration of RM292.79m or RM3.10 per ordinary share in CCM. Upon completion of the proposed acquisition, BKB’s shareholding in CCM will increase from nil to about 56.32% equity interest in CCM. Accordingly on the proposed acquisition becoming unconditional, BKB will be obliged to extend the proposed offer at a cash offer price of RM3.10 per CCM share.

Listing status. If and when the proposed acquisition of PNB’s stake becomes unconditional and the proposed offer is accepted by other shareholders upon MGO, CCM would be privatised

Rationale. We believe that the acquisition by BKB would be synergistic to its business as BKB is largely involved in the manufacturing and distribution of chemical products. BKB is also more diversified than CCM and most of the chemicals manufactured by BKB’s subsidiaries are manufactured and distributed by CCM as well. We believe that the potential acquisition would offer economies of scale for BKB as it would have about c.85% of the caustic soda market share upon acquisition of CCM.

Justification against antitrust laws. After the proposed acquisition, BKB will control c.85% of the chlor-alkali market share. The Malaysian Competition Act provides for individual exemptions, block exemptions and permits relevant provisions to be used as a defence (in the event of an investigation or litigation). It is anticipated that individual exemptions will be granted only for agreements that are particularly novel or carry a high degree of importance to the wider economy. Malaysia is still a net importer of chlor-alkali and even with a c.85% market share, the pricing power of BKB for chlor-alkali products would be low as it follows an international benchmark and the barriers to entry is also low.

HLIB’s view

Good offer. This development is perceived to be very positive to shareholders as the current offer price of RM3.10 is 111% above our previous target price of RM1.47. At RM3.10, we believe CCM is significantly overvalued at 28.5x and 25.4x FY20f and FY21f EPS.

Forecast. Maintained.

We advise investors to ACCEPT the offer at RM3.10. CCM’s financial performance was already subdued before the MCO due to weak chlor-alkali product demand and prices. Despite seeing an uptick in demand for its polymer division, its ASP has remained lacklustre due to competition as a result of low barriers to entry

Source: Hong Leong Investment Bank Research - 18 Nov 2020