KLK made an offer to acquire IJM Corp’s 56.2% stake in IJMP for a cash consideration of RM1.53bn (or RM3.10 per IJMP share). The offer price of RM3.10 per IJMP share values IJMP at an equity value of RM2.73bn (or EV of circa RM54k/ha). The offer price is fair for IJMP’s shareholders (especially those without a long investment horizon), given (i) lukewarm price sentiment for plantation stocks on the back of ESG concerns, (ii) our view that CPO price has peaked, and (iii) the offer price represents an 18.8% premium to our TP on IJMP. KLK has no issue in funding the acquisition, given its cash pile of more than RM3.5bn, and the proposed acquisition will result in a marginal increase in KLK’s net gearing ratio. Maintain BUY on KLK, with unchanged TP of RM26.60. Maintain BUY on IJMP, with a higher TP of RM3.10.

KLK to acquire IJMP at RM3.10/share. KLK made an offer to acquire IJM Corp’s 56.2% stake in IJMP for a cash consideration of RM1.53bn (or RM3.10 per IJMP share). Subject to IJM Corp’s acceptance and execution of the definitive agreement of the offer (which IJM Corp has agreed in principle), KLK will be obliged to extend a mandatory general offer (MGO) to acquire all the remaining IJMP shares for similar offer price, which will in turn value IJMP at an equity value of RM2.73bn. We note the offer price will not be adjusted for IJMP’s interim DPS of 10 sen (payable on 30 July).

KLK’s oil palm plantation landbank to expand by 28.6%. The proposed acquisition (if materialises), will expand KLK’s oil palm plantation landbank by 28.6% to 274,377 ha, while lowering KLK’s oil palm age profile to 12 years (from 12.2 years).

HLIB’s VIEW

Valuation wise. Based on our estimates, KLK’s offer price of RM3.10 (per IJMP share) translates to an EV of circa RM54k/ha, which is higher than its offer price to acquire part of TSH’s plantation land in East Kalimantan in 2020 (RM513m for 10,816 ha, or RM47k/ha). The price tag is slightly lower compared to Genting Plantations’ current EV of circa RM55k/ha (having adjusted for net asset value of Genting Plantations’ property and downstream businesses).

A good offer price for IJMP’s shareholders. Nevertheless, we reckon KLK’s offer price of RM3.10 per IJMP share is still fair for IJMP’s shareholders (especially those without a long investment horizon), given (i) share price sentiment on all plantation stocks will likely remain lukewarm given ongoing ESG concerns on the sector, (ii) our view that CPO price has already reached its peak, and will likely ease from 2H21 (once supply disruption on edible oil eases), and (iii) the offer price represents an 18.8% premium to our TP on IJMP, and 78% premium to IJMP’s 3-year historical average share price.

Financial impact on KLK. KLK has no issue in funding the acquisition, given its cash pile of more than RM3.5bn. Our back of the envelope calculation indicates that the acquisition of IJMP will result in KLK’s net gearing increasing to 0.26x (from 0.22x as at 31 Mar 2021)

Maintain BUY on KLK, with unchanged TP of RM26.60. Maintain BUY rating on KLK, with unchanged sum-of-parts TP of RM26.60 for now, pending completion of the proposed acquisition.

Maintain BUY on IJMP, with higher TP of RM3.10. We maintain our BUY rating on IJMP, with a higher TP of RM3.10 (from RM2.61 earlier), in line with KLK’s takeover offer price.

Source: Hong Leong Investment Bank Research - 10 Jun 2021