Kuala Lumpur Kepong (KLK) posted 9MFY23 core earnings of RM707m (YoY: -60%) after stripping out i) surplus on disposal of land (RM6.4m), ii) surplus on government acquisition of land (RM42.2m), iii) foreign exchange loss (RM75.9m) and iv) gain on derivatives (RM38.2m). The results were below our and the street full-year forecasts, making up only 54% and 48%, respectively. In view of the challenging outlook for its oleochemical segment, we cut our FY23 earnings forecast by 22%. Maintain Neutral with an unchanged SOP-based TP of RM21.39. No dividend was declared for the quarter. Separately, the Group has proposed to acquire a 33% stake in Boustead Plantations (BPlant) for a cash consideration of RM1.1bn or RM1.55/share from Boustead Holdings, thereby triggering a Mandatory General Offer (MGO) for the remaining shares not already owned.

• 3QFY23 revenue (QoQ: -15%, YoY: -27%). During the quarter, revenue fell 27% YoY to RM5.1bn mainly due to weaker contribution from plantation and manufacturing segments. Plantation sales softened by 32% YoY to RM683m, dampened by the decline in both CPO and palm kernel prices. 3QFY23 average realised CPO price slipped from RM4,857/mt to RM3,619/mt while average palm kernel price tumbled 46.5% YoY to RM1,800/mt. 3QFY23 FFB production dropped 3.2% YoY to 1.17m mt (9MFY23: 3.75m mt, YoY: +4.8%) Manufacturing sales fell 26.4% YoY to RM4.3bn on the back of weaker sales from oleochemical. On the other hand, property sales rose 15% YoY to RM61.5m, mainly attributed to encouraging property sales units from Bdr. Seri Coalfield.

• Core earnings shrank 84% YoY. Stripping out the exceptional items, the group’s core earnings retreated by 84% YoY to RM110.2m, due to weaker plantation earnings and losses at their manufacturing segment. Plantation pre-tax earnings tumbled 79% YoY to RM126m, due to higher CPO production cost and net loss of RM9m from fair value changes. Manufacturing reported a loss of RM74m, mainly attributed to loss incurred by the oleochemical segment. On the other hand, property earnings improved from RM17.4m to RM19.3m.

• Acquiring a 33% stake in Boustead Plantations. Following the acquisition of IJM Plantation in Sept 2021, KLK has set its sight to acquire a 33% stake and 1 share in BPlant from Boustead Holdings for a cash consideration of RM1.1bn or RM1.55/share. Upon completion of the deal, KLK is obliged to MGO for BPlant. Assuming the Group receives full acceptances under the proposed offer, which will result in BPlant becoming a 65%-owned subsidiary of KLK and it does not intend to maintain the listing status. Boustead Holdings and LTAT will collectively retain their remaining equity interest of approximately 35% in BPlant.

• Salient details of BPlant. BPlant Group manages 42 oil palm plantation estates, comprising 16 estates in Peninsular Malaysia and 26 estates in Sabah and Sarawak and has 10 palm oil mills (comprising 3 mills in Peninsular Malaysia, 5 mills in Sabah and 2 mills in Sarawak). It has a total landbank of approximately 97,399ha and a total oil palm planted area of 72,291ha, representing approximately 74.2% of its total land bank in Peninsular Malaysia (23,336ha), Sabah (38,670ha) and Sarawak (10,285ha).

• Requires intensive efforts to rehabilitate BPlant assets. Upon the consolidation of the merged entity, KLK will own a total landbank of 452,884ha with a total oil palm planted area of 361,334ha. Malaysian planted area will expand from 117,186ha to 189,477ha. Total FFB production is expected to increase by 17% to 5.9m mt. On the other hand, KLK’s average FFB yield of 19-22mt/ha could be dragged by BPlant’s poor FFB yield of 12mt/ha in the next couple of years. In addition, KLK also needs to fork out hefty capex to replant entire ageing planted area of 33,253ha (46% of the total planted area), which might cost about RM665m.

• Funding. Approximately RM229.2m of the purchase consideration involving RM1.1bn will be funded via the Group’s operating cash flows while the remaining RM916.m will be funded via bank borrowings. Meanwhile, the Group plans to fund the entire mandatory general offer via bank borrowings. As of 2QFY23, KLK’s coffer stands at RM2.9bn while net gearing level is at 40.5%. Assuming it receives full acceptances under the mandatory take-over offer, it needs to fork out RM2.24bn for a 65% stake. This will raise its net gearing level to about 58%, which remains at a healthy level.

• Valuations. The offer price of RM1.55/share places BPlant at a price tag of RM3.46bn, which is 15%-38% higher compared to our earlier estimated value of RM2.5bn-3bn (refer to 19th June 2023 plantation sector report) or 16% premium to the FY22’s net asset of RM1.33. Nevertheless, it still reasonably priced considering that it was valued at an EV valuation of RM56,009/ha, which is still deemed attractive given its vast landbank size in Malaysia with some located in strategic area that is suitable for property development. In-short, the deal may not be near-term earnings accretive as our calculation shows that there is an earnings dilution of at least 5-6% to the Group’s EPS. The proposed acquisition is expected to be concluded by 4Q 2023.

Source: PublicInvest Research - 25 Aug 2023