KLK has acquired Temix Oleo, an Italian-based specialist oleochemical player. Though not a sizeable acquisition in the group’s context, it signals: (a) a continuous focus on specialty oleochemicals, (b) that the integration of IJM Plantations is progressing well, and (c) a renewed expansionary outlook. Maintain OUTPERFORM and TP of RM27.00.

Stronger FFB output in FY23 as KLK continues to streamline IJM Plantations. The re-organisation of IJM Plantations’ work teams, following its acquisition, to comply with local regulations caused some production disruptions which have since been resolved. Coupled with further streamlining, better FFB output can be expected in FY23. Meanwhile, CPO price should stay firm, averaging RM3,800 per MT over FY23/24F despite record Brazilian soyabean output as poor Argentinean harvest weighs down overall Latin American surplus. US soya planting surveys also suggest flattish YoY change in planting area. Even with a 5% increase in US soya planting for 2023, the recovery in overall edible oil supply looks delicate for 2023 with lower than-average inventory levels likely to extend into 2024. Although higher cost could stay sticky, better FFB production coupled with easing fertiliser prices should contain some of the cost inflation.

Two downstream investments in six months. KLK ventured into basic oleochemicals three decades ago, followed by specialty oleochemicals about 15 years ago. Besides adding value to upstream, its downstream segment aims to become a global solution partner. Therefore, while big volume basic oleochemical plants are mostly sited in South East Asia where abundant palm-based raw material is more easily accessible, better margin specialty lines are located closer to their end-markets, notably Europe but also the American bio-chemical customers. Whilst current economic slowdown in Europe may dampen demand to a certain extent, it also creates opportunity for consolidation. The acquisition of a controlling stake in Temix Oleo by KLK is essentially to tap into Temix’s expertise in developing natural or bio based chemicals as well getting access to its European customer base. The acquisition should be net earnings accretive but with profit of just around RM30-60m. Separately, about six months earlier, the group has also raised its long-standing investment in UK polymer specialist, Synthomer, from 21.3% to 26.3%.

Gearing and dividends: After acquiring IJM Plantations, KLK’s net gearing rose to 54% in 2QFY22 but has since moderated to 48% by end of 1QFY23. With firm forward CPO prices expected, net gearing should continue to moderate over FY23/FY24 even after the acquisition of Temix Oleo which is estimated to cost between RM300- 400m. Dividend-wise, KLK does not commit to a strict dividend policy but its 10-year NDPS range is between 45.0 sen to RM1.00 while the median/mean annual payouts are 50.0 sen/60.0 sen; hence, we maintain our forecast 50.0 sen NDPS for FY23/FY24.

Maintain OUTPERFORM and TP of RM27.00. Although the acquisition of Temix Oleo is relatively small for KLK, it does signal that KLK is comfortable with the progress made integrating IJM Plantations’ sizeable operations into its fold and is making plans for the future again, including expansion. We are keeping our FY23-24F CEPS intact, which are already 12-29% above consensus. Likewise, there is no change to our recommendation and TP, which is based on 15x FY23F CEPS to reflect historic integrated ratings plus a 5% premium to in view of the group’s 4-star ESG score.

Source: Kenanga Research - 13 Apr 2023