Wednesday, December 15, 2010

OSK Research maintains Neutral call on KLK, unch TP RM20.50

KUALA LUMPUR: OSK Research is maintaining its Neutral call for Kuala Lumpur Kepong with its target price unchanged at RM20.50.

It said on Wednesday, Dec 15 that Yule Catto contributes very minimally to KLK's net profit i.e. with less than 1%. As such, its doubts the acquisition of PolymerLatex would make any material difference to KLK's bottom line.

To recap, KL Kepong will spend RM209.8 million to subscribe for Yule Catto & Co's rights issue. Yule Catto, which is listed on London Stock Exchange, has proposed to acquire PolymerLatex Group for 443 million euros via the rights issue and bank borrowings.

PolymerLatex Group is an emulsion polymer products manufacturer with assets in Europe and Asia, which among others, supplies raw material for the manufacture of synthetic rubber gloves.

OSK Research said'' KLK has a 18.8% stake in Yule Catto. As Yule Catto is trading at an undemanding 10.7 times'' CY11 earnings and 7.0x EV/EBITDA, it makes sense for KLK to subscribe for the rights to prevent its stake from being diluted.

'Moreover, the rights shares are priced at a steep discount of 34.7% to their theoretical ex-rights price. The subscription will do little to stretch KLK's balance sheet. Its gearing is very low at 7.2% and cash flow generation is very strong given the currently high CPO price. KLK generated an operating cash flow of RM783.9m in its FY2010,' it said.

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