• KLK’s wholly-owned subsidiary Taiko Plantations Pte. Ltd has on 24 April 2020 entered into Conditional Shares Sale and Purchase Agreement (“CSSPA”) with Ladang Lekir Sdn Bhd for the proposed acquisition of 60% equity interest in PT Pinang Witmas Sejati (“PWS”) for a total cash consideration of RM342m.
• We are positive on this deal as the deal would expedite the group’s upstream expansion in Indonesia as some 14,106ha had already been planted – raising its total planted area in Indonesia to c. 129,404ha.
• Maintain earnings forecast with new TP of RM22.80 vs. RM23.80 previously. As KLK’s share price has fallen by 18% YTD, we now see value emerging in the stock with upside of 12% from current price. Upgrade to BUY.

Details of proposal

Based on the announcement, KLK’s wholly-owned subsidiary, Taiko Plantations PTe. Ltd has entered into a conditional agreement (CSSPA) with PWS’s shareholder Ladang Lekir Sdn Bhd, to acquire free from all encumbrances, 15,000 ordinary shares of nominal value Rp.1,000,000/each or equivalent to 60% equity interest in PWS for cash consideration of RM341.55m. The remaining 40% equity interest in PWS is controlled by PT Trimitra Sumberbuana (“PTTS”). Upon completion of the due diligence process satisfactory, the proposed acquisition is also subject to the execution of a JV agreement between KLK and PTTS. The proposed acquisition is expected to be completed in the 3rd quarter of 2020.

Rationale

According to the announcement, the proposed acquisition is in-line with KLK’s long-term strategy to increase its interest in the palm oil upstream business. The proposed acquisition, in our view, will 1) increase KLK group’s combined plantation landbank in Malaysia and Indonesia – by 14,980.5ha to c. 290,400ha; 2) expedite KLK group’s upstream expansion in Indonesia as some of 14,106ha of the Hak Guna Usaha (HGU) Land are planted – raising total planted area in Indonesia to 129,404ha (115,298ha as at Sep 2019), with 90 MT/hour palm oil mill situated on the land; and 3) contribute positively to the Group’s earnings as well as shareholders’ value in the future.

About Ladang Lekir Sdn Bhd

Ladang Lekir Sdn Bhd is an indirect wholly-owned subsidiary of Perak State Agricultural Development Corporation and PWS’s shareholders. PWS has been granted 2 HGU titles for 14,738.4ha of land (expiring 2034) and another 242.09ha of land expiring in 2038, of which 14,106ha of the HGU land is planted. Both plots are located in Kecamatan Bayung Lencir, Kabupaten Musi Banyuasin in South Sumatera.

Financial effects. The proposed acquisition is not expected to have any material effects on earnings, EPS and net assets of KLK’s in FYE20. According to the announcement, the proposed acquisition will be funded by a combination of KLK’s existing cash reserve, and bank borrowing. The cash consideration of RM341.55m is about 18% of KLK’s cash in hand as at end-Dec 2019. Assuming 50% of the acquisition is funded via borrowing, the groups’ gearing level is estimated to increase from 46% to 49% with KLK’s cash and cash equivalent reduced from RM1.85bn to RM1.68bn with borrowing at RM6.71bn.

Acquisition is fairly priced? We are positive on the acquisition as the deal would expedite the group’s upstream expansion, raising KLK’s total planted areas to c. 227,483ha with longterm earnings growth potential. The deal comes to an approximately RM22,800/ha, which we view as fair for brownfield that comes with 90mt/hour palm oil mill as compared to the land costs in Kalimantan Timur they bought in 2018 for cash consideration of RM300m which is equivalent to RM25,858/ha from PT Putra Bongan Jaya.

Maintain forecast. We make no changes to our earnings forecast. Nonetheless, KLK’s share price has fallen by 18% YTD and now we see value emerging in the stock with an upside of 12% from current price. The stock is also currently trading near its 5-year average PER of 29.3x (current FY20F PER: 30.0x). As such, we upgrade to BUY with new TP of RM22.80 based on P/B of 2.2x and historical 3-years average BV/share of RM10.36.

KLK is one of our favorite plantation company given that its age profile of 12.4 years is a major catalyst to its revenue and earnings growth moving forward. About 60% of its planted area (213,377ha) is in the lucrative prime age to benefit from the uptrend/improvement in palm oil prices. The potentially higher realized price in 2020 vs. 2019 should see KLK’s plantation segment fetching better margins in FY20 and FY21.

One caveat however is that KLK’s share price performance may be capped by the near-term headwinds within the industry and economic landscape. Although its downstream segment may act as buffer against any potential downside risk from upstream segment, there is high possibility of profit margin squeeze in downstream segment due to weakening demand and price of palm products.

Source: BIMB Securities Research - 27 Apr 2020