Highlights

KLK announced that it is forming a joint venture (JV) with UEM Sunrise (UEMS) to develop 2 parcels of freehold land (measuring 3,000 acres) in IDR, Johor, via the formation of two JV companies namely: (1) Scope Energy Sdn Bhd (SESB), where KLK will hold a 60% stake and UEMS will hold the remaining 40% stake; and (2) Aura Muhibah Sdn Bhd (AMSB), where KLK will hold a 40% stake and UEML will hold the remaining 60% stake.

Under the agreement, KLK will:

1. Dispose 2,500 acres of land in KLK’s Fraser Estate (which is currently part of an oil palm estate in Kulai, Johor) to AMSB (the JV company which KLK will hold a 40% stake) for RM871.2m (or RM8 psf). AMSB will then develop the land into a mixed development project (with GDV of RM5bn) over 15 years; and

2. Subscribe to a 60% stake in SESB, which will acquire 500 acres of land from UEML for RM871.2m (or RM40 psf). SESB will then develop the land into a mixed development project (with GDV of RM15bn) over 8 years.

Proceeds from the land disposal will be utilized for general working capital purposes (including funding for the abovementioned joint development).

The land sale is expected to complete by 3Q CY2015.

Financial Impact

Other than one-off gain of RM816.8m from the disposal of Fraser land, we do not expect the proposed joint development to contribute significantly to KLK in the near term. Pros/Cons  While the latest development allows KLK to unlock its land value and leverage on its JV partner’s (UEMS)’s experience (particularly, its township development experience in Johor), we are neutral on the latest development, given our not-so positive view on the property sector’s near-term outlook. Nevertheless, we are long-term positive on the JV.

Earnings Forecasts

Maintained for now.

Risks

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

Sell

Negatives – (1) Illiquid trading volume; and (2) Pricey valuations.

Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet.

Valuation

Maintain SOP-derived TP at RM21.37 (see Figure 2) as well as our SELL recommendation on the stock.

Source: Hong Leong Investment Bank Research - 10 Feb 2014