This article first appeared in The Edge Financial Daily on April 27, 2018

Kuala Lumpur Kepong Bhd
(April 26, RM25.50)
Maintain hold with a target price (TP) of RM27.76: Kuala Lumpur Kepong Bhd (KLK) made an announcement on Wednesday with regard to the proposed acquisition of 95% stake in PT Putra Bongan Jaya (PBJ) from PT REA Kaltim Plantations for a total cash consideration of US$76 million (around RM296 million). PT REA Kaltim is a subsidiary of London-listed REA Holdings plc. KLK expects to complete the acquisition by the third quarter of 2018 (3Q18) and the agreement will lapse if all conditions have not been satisfied prior to Jan 31, 2019.

PBJ was granted in 2009 the rights (Hak Guna Usaha) to cultivate 11,602ha of land in Kalimantan Timur for a period of 35 years (generally renewable for a further period of 25 years). PBJ has also obtained the location permit (Izin Lokasi) for an additional 4,460ha for oil palm plantation for a period of three years (generally renewable for a further period of one year). PBJ’s plantations have been planted with oil palm since 2009. It is projected that approximately 7,482ha will be planted by 3Q18, of which 810ha will be mature and the balance immature. The gross asset of PBJ at Dec 31, 2017 was US$77.3 million and the net asset (after deduction of the 5% non-controlling shareholder interest) was US$51.2 million. Loss before tax was US$200,000.

This is KLK’s second acquisition after Elementis Specialties Netherlands BV (back in December 2017). We are not surprised by this news as management has guided previously that the group is still actively looking for potential mergers and acquisitions after its unsuccessful RM2.3 billion bid to take over MP Evans Group plc in 2016. According to KLK, the acquisition of this brownfield is in line with KLK’s business direction to expand its plantation land bank. The acquisition price translates into price to net asset value of around 1.5 times or US$4,981 per ha, which we deem as fair against recent market transactions.  

The acquisition will enhance KLK’s planted land bank by 3.5% to 218,000ha post the completion. Funding is not an issue as the group had a RM2.2 billion cash pile as at Dec 31, 2017. Its net gearing stood at 0.2 times only. Our back-of-the-envelope calculation revealed that the acquisition is likely to be earnings neutral for KLK as it is expected to result in a deduction of less than 1% to KLK’s financial year 2019 (FY19) earnings projections after factoring in the loss of interest savings and earnings losses from PBJ.

Maintain KLK TP at RM27.76, based on sum-of-parts valuation. The TP translates into 2019 implied price-earnings ratio of 23.5 times. Maintain “hold” recommendation. Potential rerating catalysts for the stock include stronger-than-expected fresh fruit bunch growth, improvement in downstream margin, and higher crude palm oil prices. — TA Securities Research, April 26