KLK finalising acquisition of Dutch chemicals maker
KUALA LUMPUR Kepong Bhd (KLK) is now close to acquiring a Netherland-based surfactant chemicals manufacturer as it seeks to strengthen its presence in the oleochemicals segment.
The move is rather unsurprising as the plantation giant has previously indicated its intention to actively pursue potential merger and acquisition opportunities, after its failed a RM2.3bil takeover bid of London-listed MP Evans Plc last year.
KLK is proposing to buy Elementis Specialities Netherlands BV (ESN) in Delden, the Netherlands, for 39mil (RM187.2mil). ESN, which is primarily involved in surfactant manufacturing, is expected to strengthen KLK’s downstream chemical specialties business in Europe.
Surfactant is a type of chemical commonly found in detergents, which in turn is an oleochemical product.
In a filing with Bursa Malaysia on Tuesday, the plantation company says its unit Kolb Distribution AG plans to acquire the entire equity interest in ESN within the next six months from its current owner Elementis BV.
“The Delden site will expand the existing Kolb business portfolio in terms of product range and market coverage. The Delden production site is serviced by good rail and road links and is located strategically close to key customers and
raw material supply routes.
“ESN comes with a large established customer base and is expected to generate overall benefits to KLK’s chemical business. Upon completion of the acquisition, the Delden site will continue to supply a range of specialty chemicals in Elementis Specialties Inc under a long-term supply agreement,” it says.
KLK will be financing the acquisition of ESN via a combination of cash reserves and bank borrowings.
Given the volatile crude palm oil (CPO) prices, KLK’s strategy to grow its downstream business could help to mitigate earnings volatility as demand for downstream products is generally more stable.
Moving into 2018, average CPO price is expected to take a dip on a year-on-year basis, as palm oil inventory is rising.
To put it into context, Malaysia’s palm oil stocks as at end-November have risen to the highest level since Dec 2015, trumping Bloomberg consensus forecast by nearly 2.3%.
According to CIMB Research, the higher-than-expected palm oil stockpile was due to lower-than-expected exports and is near-term negative for CPO prices.
The research house projects CPO price in 2018 to average at RM2,700 per tonne, compared to this year’s estimated average of RM2,800 per tonne. On the other hand, Kenanga Research expects 2017 and 2018 average CPO price at RM2,700 and RM2,400 per tonne respectively.
While it remains to be seen whether the acquisition of ESN would financially improve KLK’s oleochemical business, the plantation giant is upbeat that the division will post stronger results in the current financial year 2018 (FY18).
This is amid the existing excess capacity in the oleochemicals industry.
In FY17, KLK’s oleochemicals segment took a hit in profitability, mainly caused by the 35%-higher crude palm kernel oil which is the major feedstock.
The division’s bottom line shrunk by 61.4% year-on-year (y-oy) to RM115.5mil, compared to RM299.4mil a year earlier.
The acquisition of ESN is unlikely to have any material impact on KLK’s earnings in the current financial year. The group expects the new business to contribute positively to its future earnings.
However, analysts are generally neutral on KLK’s proposed acquisition of the surfactant manufacturer.
In its note, Kenanga Research projects ESN to have minimal earnings contribution of less than 5% to the group in the near term.
“We are neutral on the acquisition, given limited earnings and balance sheet impact, although the acquired assets should be complementary to existing businesses.
“Valuations-wise, while comparable transactions are somewhat limited, we calculate a price-to- book value (PBV) of 1.3 times, which is slightly higher than IOI Corp’s and KLK’s two previous oleochemical plant acquisitions, both at PBV of 1 time.
“However, we think the premium is justified, given the long-term supply agreement and existing profitability of the plant.
“We expect a slight increase in net gearing to 0.18 times but we believe this remains within a comfortable level, considering KLK’s ample cash balance of RM2.04bil at end-FY17,” says the research house.
KLK’s financials
In FY17 ended Sept 30, the group’s bottom line has fallen by nearly 37% y-o-y to RM1.01bil, primarily attributed to its significantly lower other operating income and higher operating expenses.
KLK’s operating income was higher in FY16 largely because of a surplus of RM489.3mil, derived from the sale of plantation land to an associate.
Despite the lower net profit in FY17, the plantation giant’s revenue rose by 27.25% y-o-y to RM21bil in the year.
This was largely on the back of stronger plantation segment top line, driven by higher CPO prices throughout the year.
Share price-wise, the Main Market-listed counter is up by 3.7% to RM24.46 over the last one year, bringing its market capitalisation to nearly RM26bil. Its current price-to-earnings ratio stands at 25.91 times.
According to Bloomberg, three research houses have issued “buy” calls on KLK, while 17 others have “hold” ratings on the stock. On the other hand, three research houses have recommended “sell” on KLK.
Main Market-listed Batu Kawan Bhd is the single largest shareholder in KLK, with an equity interest of 47.1%. The Employees Provident Fund holds about 11.9%, second only to Batu Kawan.