Highlights

• KLK launched a takeover offer to acquire M.P. Evans Group plc (MPE, which is listed on AIM) for £358m (RM1.8bn).

• MPE operates oil palm and rubber plantations in Indonesia (with total planted area of 34,650 ha and average age of ~10 years), beef-cattle operations in Australia and property development in peninsular Malaysia (which is in the course of disposal).

• The board of MPE, however, viewed KLK’s offer as wholly inadequate and substantially undervaluing the company (given its unique position and future growth potential), and urged shareholders to take no action in relation to the offer.

Comments

• Pricing wise… The price tag values MPE at FY16 P/E of 22.7x (based on consensus forecast), current P/B of 1.14x, and EV/ha of ~RM50k (without taking into account of its property and cattle businesses). Nevertheless, we believe KLK may end up with a higher price tag, as the board of MPE views KLK’s offer as inadequate.

• Impact… The offer (if accepted) will result in KLK’s total borrowings rising from RM4.6bn and 0.44x to RM6.6bn and 0.62x respectively.

Earnings Forecasts

• Maintained.

Risks

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD (↔)

• While we like KLK for its age profile and healthy balance sheet, further upside is capped by its rich valuations and weak property sentiment (which will in turn drag its property division).

Valuation

• Maintain SOP-derived TP of RM22.09 (see Figure 1) and HOLD recommendation on the stock

Source: Hong Leong Investment Bank Research - 26 Oct 2016