• Kuala Lumpur Kepong Berhad (KLK) has proposed to buy 33% and 1 share of the total issued shares of Boustead Plantations (BPlant) from Boustead Holdings Berhad (BHB) for a sum of RM1.146bn, equivalent to RM1.55 per share.

• This potential sale is a part of strategic collaborative initiative involving BHB, its parent company the Armed Forces Fund Board (LTAT), and KLK; aimed at privatizing BPlant. However, this initiative is unlikely to generate much excitement, at least for KLK.

• There will be no change to our earnings estimates, pending the finalization of this acquisition. We maintain a HOLD rating on KLK with a TP of RM24.05 for KLK.

Details of the Offer

KLK on 24 August 2023 has entered into a strategic collaboration agreement (“SCA”) with BHB and LTAT, to work together in a strategic collaboration to improve the estates efficiency and enhancing crude palm oil yield of BPlant's plantations over the long-term. As a part of this collaboration, KLK has proposed to acquire 739.2mn shares of BPlant, representing 33% and one share of the total shares, from BHB for a cash consideration of RM1.15 bn or RM1.55 per share. Upon completion of this proposed acquisition, KLK's ownership stake in BPlant will rise from zero to 33% and one share. On the other hand, BHB and LTAT will maintain their combined equity interest of approximately 35.0% in BPlant. As outlined in the terms of the proposed acquisition, both BHB and LTAT will collaborate with KLK, share the responsibility of making a mandatory takeover offer to acquire all the remaining BPlant shares not already owned by them for a cash offer of RM1.55 per share, aiming at privatizing BPLANT.

About Boustead Plantations

BPlant's origin can be traced back to its incorporation in the Federation of Malaya under the Companies Ordinance 1910, taking place on July 4, 1946. It commenced operations as a public limited company named The Kuala Sidim Rubber Company, Limited. Subsequently, on April 15, 1966, the company underwent a name change to become The Kuala Sidim Rubber Company Berhad, followed by another change to Kuala Sidim Berhad on December 12, 1994. Its current name, BPlant, was adopted on April 10, 2004. The company waslisted status on the Main Market of Bursa Securities on June 26, 2014.

BPlant's main activities revolve around investment holding and operations related to oil palm plantations. Its subsidiaries are primarily responsible for the management and ownership of oil palm plantations, the cultivation of oil palm trees, and the production of derivatives like crude palm oil (CPO) and palm kernel. Additionally, BPlant's associates, KLK, and its parent, BHB have shared an equal partnership since 1986, facilitated through Applied Agricultural Resources Sdn Bhd. This joint venture company is primarily engaged in providing agronomic advisory and research services, focuses on the commercial production of oil palm seeds and planting materials.

As of December 31, 2022, the BPlant Group manages 42 oil palm plantation estates - 16 in Peninsular Malaysia and 26 across Sabah and Sarawak. The company operates a total of 10 palm oil mills, which spread across 3 mills in Peninsular Malaysia, 5 in Sabah, and 2 in Sarawak. The company possesses a vast land bank of approximately 97,399 hectares and maintains a total oil palm planted area spanning 72,291 hectares. This area corresponds to roughly 74.2% of the company's entire land bank, distributed as follows: 23,336 hectares in Peninsular Malaysia, 38,670 hectares in Sabah, and 10,285 hectares in Sarawak.

Sources of funding

As per the announcement, if the Proposed Acquisition and Proposed Offer are successfully completed in the 4Q23, it is anticipated that the Proposed Strategic Collaboration will have a positive impact on earnings and earnings per share of the KLK Group for FYE24. The funding for the Proposed Acquisition and Proposed Offer, on the other hand, will be a combination of bank borrowings and internally generated funds (the specific proportion of these funding sources will be determined at a later date). Based on the announcement, the cash consideration for the acquisition of RM1,145.76mn, constitutes to approximately 41% of KLK's available cash as of the end of June 2023. Assuming 50% of the acquisition cost is financed through borrowing, the estimated gearing level of the group is projected to rise from 46% to 54%. This would lead to a reduction in KLK's cash and cash equivalents from RM2.8bn to RM2.2bn, with the borrowing level reaching RM9.9 billion, indicating a 6% increase.

Our view

The total market value of BPlant at the offer price amounts to RM3.47bn. In the case of KLK, the offer price of RM1.55 per share presents a 13% premium compared to BPlant's latest closing price of RM1.37 per share. It's worth noting the rise in the closing price due to rumours of the acquisition back in June. In terms of valuation, the RM1.55 per share offer is equivalent to 1.21x P/B ratio, as indicated by the unaudited financial statement as at June 2023. This valuation is notably higher than BPlant's historical average P/B ratio of 0.57x over the past five years. This leads us to consider the acquisition price as relatively high, considering a couple of factors: 1) BPlant’s core profit before tax has been in declining trend since March 2022, with the latest quarter 2Q23 recording a loss of RM6.2mn (1H23: profit of RM7.3mn against RM253mn in 1H22) mainly due to hinger manuring costs and a decrease in FFB production (Sarawak estates in the 1H23 recorded an operating loss of RM11.1mn); 2) low productivity due to lower yield, specifically on oil yield per hectare of 2.7, which places it among the least competitive within our stock under coverage, and 3) less attractive trees' age profile or approximately 16.4 years, which signifies about 46% of them already passed their prime age of 20 year.

However, looking at the perspective of enterprise value (EV) per planted area (EV/ha), the purchase consideration at RM56,009 per hectare seems justifiable and equitable. This is because this consideration aligns closely with the average of RM56,448 per hectare among BPlant's peers (as per announcement details). The key consideration here is how KLK will leverage synergies and contribute to enhancing the efficiency and productivity of the estates. Their challenge is to generate enough revenue to balance the costs incurred through this proposed strategic collaboration. A significant caveat revolves around the scenario where anticipated productivity improvements do not materialize despite KLK's expensing the capital expenditure. This situation may negatively impact KLK shareholders but conversely benefit BHB and LTAT shareholders, in our view.

Maintain HOLD at TP of RM24.05.

Maintain a HOLD call with a TP of RM24.05; based on historical low 3-year average P/BV of 1.74x pegged to KLK’s FY24 BV/share of RM13.82.

Source: BIMB Securities Research - 25 Aug 2023