Highlights

KLK has entered into an agreement to acquire a 20.1% stake in Equatorial Palm Oil Plc (EPO) and a 50% stake in Liberian Palm Development (LPD) from Biopalm Energy Limited (BEL) for a total sum US$21.3m (or RM67.6m) cash.

EPO (a public listed company in the UK) has a 50% stake in LPD (via JV). As at 31 Dec 2012, LPD had a total landbank of 168,948 ha in Liberia, of which most remained unplanted (see Figure 1).

Upon signing the SPA, KLK has also entered into two additional agreements to provide immediate funds for the development of LPD’s oil palm estates in Liberia.

Post acquisition, KLK will own an effective 60.05% stake in LPD.

The acquisition is targeted to complete within 2 weeks.

Financial Impact

KLK will not have issue funding the offer. Based on our estimates, the acquisition will only raise KLK’c net debt and net gearing to RM571m and 0.08x (from RM503m and 0.07x as at Jun 2013).

Pros/Cons

Neutral, as it would take a while before KLK start seeing meaningful contribution from this venture.

While expanding KLK landbank, it also comes with risks (currency and regulatory) associated with oversea ventures.

Earnings Forecasts

Maintained.

Risks  (1) Earlier-than-expected recovery in the world’s major economies, resulting in better edible oil demand and prices; and (2) Weather uncertainties revisit, which would in turn result in edible oil supply distortion, hence boosting edible oil prices.

Rating

Sell

Negatives – (1) Illiquid trading volume; and (2) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO.

Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Stable property earnings for the next two years.

Valuation

Maintain SOP-derived TP at RM18.17 (see Figure 1) as well as our SELL recommendation on the stock. While we continue to believe KLK will benefit from commendable downstream (arising from lower feedstock cost) and property division performance, we believe share price will likely be capped by its rich valuations (at 18.6x FY09/14 P/E).

Source: Hong Leong Investment Bank Research - 8 Nov 2013