KLK has proposed to acquire a surfactant chemicals business for EUR39.0m (RM187.2m) from Elementis B.V. We are neutral on the acquisition given limited earnings and balance sheet impact, though the acquired assets should be complementary to existing businesses. No change to our FY18-19E CNP of RM1.14-1.22b. Maintain MARKET PERFORM call with unchanged TP of RM25.00.

Acquiring surfactant business. KLK announced that its subsidiary Kolb Distribution AG is proposing to acquire the entire stake in Elementis Specialties Netherlands BV (ESN) from Elementis BV for a purchase consideration of EUR39.0m (RM187.2m). ESN assets include working capital, plant & machinery, storage facilities, laboratories and all other tangible assets and inventories associated with the surfactant chemicals business conducted at ESN?s 16.2ha stand-alone site at Delden, the Netherlands. The acquisition is slated for completion in 1HCY18.

Bolt-on downstream acquisition. We are neutral on the acquisition as we expect minimal earnings contribution (<5%) to KLK in the near term based on historical earnings contribution of the division to Elementis (which we estimate at c.RM25m/year). However, management noted that the Delden plant would complement existing KLK assets in the area, and has already locked in demand via a long- term supply agreement to its previous owner, Elementis. Valuations wise, while comparable transactions are somewhat limited, we calculate a PBV of 1.3x which is slightly higher than IOICORP and KLK?s two previous oleochemical plant acquisitions, both at c.1.0x PBV. However, we think the premium is justified given the long-term supply agreement and existing profitability of the plant. We expect slight increase in net gearing to 0.18x (from 0.16x) but believe this remains within a comfortable level considering KLK?s ample cash balance of RM2.04b at end-FY17.

Moderate recovery. We expect to see continued downstream segment performance improvement as PK prices have been comparatively stable in recent months, while better crude oil prices would improve demand for alternative oleochemical products. Meanwhile, for the upstream segment, we expect better FFB production in 2018, in line with the sector outlook, though this would likely be offset by softer prices, especially in 2HCY18.

No change to FY18-19E CNP of RM1.14-1.22b as we expect minimal earnings impact from the acquisition.

Reiterate MARKET PERFORM with unchanged TP of RM25.00 based on CY18E EPS of 109.2 sen applied to unchanged Fwd. PER of 22.9x. Our Fwd. PER of 22.9x is premised on mean valuation basis, as we expect upstream productivity improvements to be offset by weaker prices. Downstream prospect should be brighter on supportive crude oil prices and stabilising input cost. As such we reiterate our MARKET PERFORM call on KLK.

Source: Kenanga Research - 13 Dec 2017