Stock Name: KLK
Company Name: KUALA LUMPUR KEPONG BHD
Research House: RHB

Kuala Lumpur Kepong Bhd
(Nov 2, RM19.74)
Maintain outperform at RM19.78 with fair value at RM24.70: Kuala Lumpur Kepong (KLK) has entered into an agreement to acquire a 95% stake in PT Anugrah Surya Mandiri (PT ASM) for IDR13,585 million (RM4.72 million).

PT ASM holds a location permit (izin lokasi) for 3,700ha of land in Kampung Batu Putih, Kecamatan Batu Putih, Kabupaten Berau, Indonesia, which it intends to develop into oil palm plantations.

The purchase consideration will be financed by KLK's internally generated funds and the acquisition is expected to be completed in 1Q2012.The acquisition price of RM4.72 million'' for an effective 3,515ha of land works out to RM1,342 per ha, which is in line with other greenfield land transactions in Indonesia of RM1,200 to RM2,000 per ha.

We are positive on the acquisition as it would provide KLK with synergies, given that the land is adjacent to one of KLK's plantations in Kalimantan Timur. We estimate this acquisition will increase KLK's Indonesian landbank by about 2.6% to 136,630ha.

Main risks include: (i) a convincing reversal in crude oil price trends resulting in reversal of crude palm oil (CPO) and other vegetable oils price trends; (ii) weather abnormalities resulting in an over or under-supply of vegetable oils; (iii) revision in global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

We expect contributions from this acquisition to come through only in FY15/16, assuming KLK is able to start planting immediately once the acquisition is completed, while the acquisition cost of RM4.72 million would have already been included in our capital expenditure (capex) assumptions for FY11.

We maintain our sum-of-parts (SOP)-based fair value for KLK at RM24.70. We continue to like KLK for its inexpensive valuations (it remains the cheapest among the big-cap plantation stocks) and for its strong management with a good track record.

Further catalysts could come from better than expected fresh fruit bunch (FFB) production growth as well as sustainable return to profitability of the retail division. We maintain our 'outperform' rating on the stock. ' RHB Research Institute, Nov 1


This article appeared in The Edge Financial Daily, November 3, 2010.