Investment Highlights

• We maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM23.85/share, based on FY24F PE of 18x, which is the 5-year mean for big cap planters. We ascribe an unchanged neutral 3-star ESG rating for KLK and maintain our earnings forecasts for now.

• We are neutral on KLK’s acquisition of Boustead Plantations (BPlant). We believe that the acquisition would not be earnings-accretive in the short-term as BPlant has high production costs and low FFB yields. BPlant recorded a net profit of RM5.2mil in 1QFY23 vs. RM435.2mil in 1QFY22 as CPO prices plunged and costs of production increased.

• In the long-term, however, we reckon that KLK would benefit from an increase in the size of planted areas and conversion of some of BPlant’s estates into property development. It would take time for KLK to rehabilitate and replant BPlant’s ageing oil palm trees.

• In respect of land with property development potential, BPlant has 247ha of estates in Semenyih, 509ha in Penang and 7,513ha in Johor. Overall, KLK’s planted areas would expand by 72,291ha to 360,707ha from 288,416ha.

• We estimate that KLK would be spending RM2.3bil on the take-over of BPlant. Assuming the group borrows RM1.6bil to finance the acquisition, KLK’s net gearing would increase to 57% from 45% as at end-September 2022.

• The take-over price of RM1.55/share for BPlant implies an EV of RM57,591/ha. We believe that this is fair as the market price of a prime oil palm estate ranges from RM70,000 to RM100,000/ha. The market price can be higher than these levels if the land has property or solar development potential.

• KLK has proposed to acquire 33% stake and one share in BPlant from Boustead Holdings for RM1.1bil or RM1.55/share. Following this, KLK would be extending a MGO for all remaining shares in BPlant not owned by the group. The proposed acquisition is expected to be completed in 4Q2023.

• KLK’s acquisition of BPlant comes after the group’s takeover of IJM Plantations for RM3.10/share or RM2.7bil in 2021.

• KLK is currently trading at a fully-valued FY24F PE of 17x vs. its 2-year average of 15x.

Source: AmInvest Research - 25 Aug 2023