• An Indonesian minority shareholder of Kuala Lumpur Kepong’s (KLK) two Indonesian subsidiaries has served a winding-up petition on the two units. He holds a 10% equity interest in each of the two subsidiaries.

• He said that the two Indonesian subsidiaries have never paid dividends and have been recording losses from 2009 to 2017. In addition, the debts of the two Indonesian units are larger than their assets.

• KLK has proposed a capitalisation exercise in the form of a rights issue. KLK has also offered a 10-year interest free loan to the minority shareholder for him to subscribe to the rights issue. The minority shareholder has not accepted KLK’s offer yet.

• KLK’s cost of investment in the two Indonesian subsidiaries were RM41.5mil in total. Shareholders’ loans amounted to RM864.3mil. Altogether, these sum up to RM905.8mil.

• The two Indonesian subsidiaries have planted areas of 16,368ha in total in central Kalimantan. Each of the subsidiaries has a palm oil mill of 60 tonnes per hour. KLK has planted areas of 213,834ha of oil palm in Malaysia, Indonesia and Liberia presently.

• In a Bursa Malaysia announcement, KLK said that if the winding-up petition is successful, it will not have a material impact on its financials and operations.

• A winding-up petition usually involves the sale of assets and the return of the disposal proceeds to the creditors.

• In this case, we reckon that there may be an impairment only if the selling price is below the cost of investment. We believe that the market value for planted areas of oil palm in Indonesia is about US$10,000/ha to US$13,000/ha currently.

• We think that the two subsidiaries in Indonesia are still making losses as the maintenance and upkeep expenses are high for young mature areas.

• Maintain SELL on KLK with a fair value of RM22.65/share.

Source: AmInvest Research - 26 Feb 2019