News  Kuala Lumpur Kepong (KLK) has announced that it has entered into a Share Purchase Agreement

(SPA) with Mitsui & Co. Ltd (Mitsui) to dispose a 20% stake in its wholly-owned subsidiary KLK Premier Capital Limited (KLKPCL) for USD44.0m or RM154.0m.

 KLKPCL owns 100% equity interest in Taiko Palm-Oleo (Zhangjiagang) Co., Ltd (TPOZ), a company incorporated in Jiangsu Province, China. Its principal activities are the manufacturing and trading of fatty acids, glycerine, soap noodles and triacetin.

 The proposed disposal is conditional on the injection of USD50.3m by KLK/KLKPCL into TPOZ to fund the latter’s expansion of plant capacity and product range.

 Additionally, KLK will maintain management of KLKPCL and TPOZ, while Mitsui is to promote the sale of TPOZ’s products to Japanese companies operating in China and assist in transferring related technology from Japan and other countries to TPOZ.

Comments  We are short-term neutral on the deal as we gather there is no earnings impact on FY15E-FY16E earnings since the proposed disposal will be accounted for as an equity transaction.

 According to Malaysian Accounting Standards FRS127, an equity transaction is recorded when there is a change in ownership of subsidiaries (in KLK’s case from 100% to 80% ownership of KLKPCL) without loss of control.

 However, we are long-term positive on this transaction due to the expansion of TPOZ’s plants and products. KLK should also benefit from Mitsui’s existing client base in China and technical expertise in downstream businesses.

Outlook  While we are long-term positive on the deal, shortterm outlook for the Manufacturing division remains challenging due to rising capacity in the industry (especially in Indonesia).

 Plantation division outlook is neutral as current CPO price is still below RM2400/MT hence earning is likely to be flat at best.

Forecast  Maintain FY15E-FY16E earnings of RM1090m-RM1065m.

Rating Maintain MARKET PERFORM

 We expect limited share price upside due to flattish earnings growth of 6% seen in FY15E. However, downside is also limited due to KLK status as big cap planters and its Shariah status, which encouraged Shariah funds to hold this stock.

Valuation  Maintain our TP of RM21.50 based on 21x PE on FY15E earnings of RM1.02. Our target PE of 21x reflects 3-year historical PE average.

Risks to Our Call Lower than expected CPO prices.

 Lower than expected margin for downstream division.

Source: Kenanga