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KUALA Lumpur Kepong Bhd’s (KLK) recent joint venture (JV) in Indonesia is expected to be good for the company’s long-term profitability, according to analysts.

“We view this development positively as although it would not be earnings enhancing in the short term, it is good for KLK’s profitability in the longer term. There would not be immediate earnings impact as it would take time to replant the trees and another three years for the trees to bear fruits,” said AmResearch in a report.

“Currently, KLK has about 216,548ha of landbank, out of which approximately 49% or 106,341ha are located in Indonesia. In FY08, Indonesian plantation assets accounted for 28% of group FFB (fresh fruit bunches) production,” it added.

KLK recently entered into a conditional JV agreement with PT Perkebunan Nusantara II (PTPN) to form a 60/40 JV company, PT Langkat Nusantara Kepong (JVCO), to lease, operate and manage PTPN’s plantation assets in North Sumatra, Indonesia.

KLK had said the joint venture company, which it has a 60% equity investment, will lease and manage about 20,700ha of land planted with oil palm and rubber, two palm oil mills and three rubber factories.

It added that JVCO and PTPN would enter into a 30-year joint operations agreement (JOA) as part of the proposed JV.

Affin Research also believed the JV will be beneficial to KLK in the long term “With CPO prices now above RM2,500/tonne and the good long-term dynamics as well as KLK’s know-how and plantation management track record, the JOA is expected to contribute to the long-term profitability of the KLK Group. The downside is cushioned by pegging the annual rental fee to JVCO’s operating profits before tax. With state-owned PTPN as a JV partner, prospect for additional land leases or acquisition by JVCO is also good,” it added.

“Net gearing stood at a comfortable 11% as at end-September 2008. We maintain our buy recommendation on KLK as it is one of the beneficiaries of a recovery in CPO prices,” noted the local research house.

Affin Research kept its target price for KLK unchanged at RM9.84. “As current price is still above our target price (even with the potential 20 sen accretion), sell is maintained. Our target price (based on 14 times CY2009 EPS) assumes an average CPO selling price of RM2,000/tonne for 2009/11,” it added.

KLK rose 20 sen to close at RM11.20 yesterday.


This article appeared in The Edge Financial Daily, May 12 2009.

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