KL Kepong; Fully Valued; RM22.90
Price Target: RM18.70; KLK MK
Potential venture into Liberia

The Business Times reported that KLK may offer to acquire all or part of London AIM-listed Equatorial Palm Oil (EPO) which owns 169,000 ha of land in West Africa. EPO has confirmed that it is in early stage discussions with KLK for the funding of its Liberian JV with Biopalm Energy Limited – Liberian Palm Developments Limited (LPD).
 
EPO (market cap GBP 11.8m/ RM60m) has been loss-making over the past few years, as most of its Liberian land bank is not planted yet and maiden harvest will only be in 4Q14. We understand that EPO has planted a total of 5,600 ha of the concession land acquired in 2007.
 
We believe that KLK may be looking into the region given the scarcity of suitable plantation land bank in Indonesia. This may mark its maiden penetration into the African continent, following the likes of Sime Darby and Golden Agri-Resources which have 220,000 ha and 350,000 ha concessions in the region respectively. The potential entry of KLK into EPO is also likely to accelerate the expansion plan of LPD given KLK’s solid balance sheet (7% net gearing, RM1.9bn cash pile).
 
Nevertheless, we believe that KLK’s current valuation of 25x FY14 EPS remains expensive. Earnings growth is also limited in the near term. Limited plantable reserves (23k ha) could also cap its FFB production going forward. We maintain our Fully Valued rating and RM18.70 DCF-derived TP.

Source: HwangDBS Research - 17 Oct 2013