KLK (RM22.80, BUY TP RM21.51) announced that it had on 8 January 2015 together with its wholly-owned subsidiary, KLK Premier Capital Ltd (KLKPCL) entered into a Share Purchase Agreement with Mitsui & Co., Ltd. for KLK to dispose a 20% equity interest in KLKPCL to Mitsui for a total consideration of US$44m (or approximately RM154m). KLKPCL owns 100% of Taiko Palm Oleo (Zhangjiagang) Co Ltd (TPOZ), which is involved in the manufacturing and trading of fatty acids, glycerine, soap noodles and triacetin. The proposed disposal is conditional, amongst others, on KLK/KLKPCL injecting US$50.3m into TPOZ to fund TPOZ’s expansion of its plant capacity and product range. For the financial year ended 30 September 2014, KLKPCL had net assets ofUS$95.5m (subsequently reduced to US$52.7m) and a net profit of US$1.1m. (Source: Bursa Malaysia)

Comment: Mitsui is a long-term business partner of KLK and the proposed disposal is to enable KLK to leverage on Mitsui’s business and marketing relationships  in  China  PR  as  well  as  its  technological  expertise  in oleochemical downstream manufacturing activities. The proposed disposal, targeted for completion in 1Q15, is not expected to have a significant impact on  our  FY15E-17E  core  net  profit  forecasts  for  KLK.  Longer  term, contributions  for  the  Jiangsu  operations  will  benefit  from  the  proposed disposal to Mitsui.

The  share  price  of  KLK  has  rebounded  to  RM22.80  (+14.6%)  from  the Dec14 low of R M19.90. Our BUY rating and TP of RM21.51 based on 18x CY15E EPS are now under review.

Source: Affin Hwang Capital Research - 9 Jan 2015