Highlights

KLK  entered  into  a  JV  agreement  with  PT  Astra  Agro Lestari  Tbk  (AALI,  an  oil  palm  plantation  giant  in Indonesia),  which  AALI  will  acquire  a  50%  stake  in  PT Kreasijaya  Adhikarya  (which  is  involved  in  the  business  of refinery  and  trading  of  refined  palm  oil  products)  for RM81.2m.

The  proposed  transaction  is  to  leverage  synergies  from both  parties’  expertise  in  the  palm  oil  sector,  where  KLK will  be  bringing  in  its  downstream  expertise while AALI will be  bringing  in  its  local  market  insight s  to  supply  sourcing as well as significant supply of quality raw materials.

The  proposed  transaction  is  expected  to  complete  in  1Q 2015,  and  is  conditional  on  approval  of  Indonesia’s  Capital Investment  Coordinating  Board. Pros/Cons

Positive,  as  the  latest  move  (by  teaming up with AALI) will ensure  the  supply  of  quality  feedstock  for  its  refinery . This is   particularly important for KLK as its own oil palm estates in  Indonesia  could  only  supply  up  to  60%  of  the  CPO feedstock required  for  its refineries i n Indonesia. Earnings Forecasts

Maintain, pending  results announcement  on  19 Nov  2014.

Risks

• Weaker-than-expected  FFB output;
• Escalating CPO production  cost; and
• Weaker-than-expected  recovery  in  edible  oil  demand  and prices.

Rating

HOLD

• 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  of  RM20.41  (see  Figure  1)  and HOLD  recommendation  on the stock.

Source: Hong Leong Investment Bank Research - 11 Nov 2014