KLK expected to expand downstream presence

This article first appeared in The Edge Financial Daily, on December 14, 2017.
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Kuala Lumpur Kepong Bhd
(Dec 13, RM24.44)
Maintain hold with an unchanged target price (TP) of RM24.18:
Kuala Lumpur Kepong Bhd (KLK) proposed to acquire Elementis Special Ties Netherlands B V (ESN) for an enterprise value of €39 million (RM187.11 million).

ESN is a unit of Elementis plc (Eplc, a global specialty chemicals company which is listed on the London Stock Exchange) and is involved in the surfactants business in Delden, The Netherlands. Its Delden plant manufactures all of Eplc’s products for its surfactants division and a range of products sold by its specialty products division.

Based on our understanding from Eplc’s financial information, the surfactant business generated an adjusted operating profit of US$9.1million in the first half of financial year 2017 (from an adjusted operating loss of $0.2million a year ago), on the back of favourable pricing conditions.

The proposed acquisition is expected to be completed in the first half of 2018. The Delden site will continue to supply a range of specialty chemicals to Elementis Specialties Inc under a long-term supply agreement.

The acquisition of ESN has an immaterial impact on KLK’s earnings given its large earnings base relative to ESN’s earnings. Nevertheless, such move will expand KLK’s business portfolio in terms of product range and market coverage. Also, the use of the Delden site as another hub for KLK’s market penetration strategy will further accelerate growth in its downstream chemical specialties business in Europe.

While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price which is capped by its rich valuations and weak property sentiment (which will in turn drag on its overall performance). — Hong Leong Investment Bank Research, Dec 13