Highlights

• KLK announced that it will raise its takeover offer for M.P Evans Group (MP Evans, listed on AIM) from 642.25 pence/share to 740 pence/share. The new offer values MP Evans at £415.4m (or RM2.24bn).

• The increased offer will be financed by KLK through an amended acquisition loan facility.

• Recall, KLK had on 26 Oct launched a surprise takeover offer to acquire MP Evans for £358m (642.25 pence/share). MP Evans had on 2 days later rejected KLK’s offer as its shareholders deemed the offer substantially undervaluing the company.

Comments

• Pricing… The new offer values MP Evans at FY16 P/E of 26.2x (based on consensus earnings forecast) and current P/B of 1.3x. We believe the latest offer fairly values MP Evans’ asset values. Based on our estimates, the latest offer price values MP Evans’ planted landbank at RM58k/ha, having taken into account of the following assumptions: (1) the remaining 6,400 ha of plantable reserves are valued at US$500/ha; and (2) MP Evans’ Malaysian assets and investments are valued at US$43.5m (based on the company’s estimates); (3) US$:MYR of RM4.33.

• Despite the higher offer, the new offer was rejected by MP Evans’ board, as it considers the new offer still “substantially undervaluing” the company.

• Impact… The offer (if accepted) will result in KLK’s net debt and net gearing rising from RM2.5bn and 0.23x (as at 30 Jun 2016) to RM4.6bn and 0.45x respectively.

• Neutral. We note that the latest development is in line with the group’s long term strategy to diversify its earnings base away from the upstream plantation business into high value added downstream activities.

Earnings Forecasts

• Maintained, pending completion of the acquisition (if it materializes).

Risks

• Weaker-than-expected FFB production and OER;

• A sharp increase in production cost; and

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

Rating

HOLD ( ↔ )

• While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations and weak property sentiment (which will in turn drag its overall performance).

Valuation

• Maintain SOP-derived TP of RM22.09 and HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 16 Nov 2016