KLK announced that its wholly-owned subsidiary, KL-Kepong Plantation Holdings  (KLKPH)  had  on  10  November  2014  entered  into  a  Joint Venture  Agreement  (JVA)  with  PT  Astra  Agro  Lestari  Tbk  (AALI), whereby  AALI  will  be  a  50%  shareholder  in  JV  Co.  The  current shareholders of JV Co are KLKPH and Tuan Al Hakim Hanafiah (AHH), holding  6,175  and  325  shares  respectively.  Amongst  the  conditions precedent, (i) KLKPH shall acquire all of AHH’s 325 shares of nominal value  at  IDR1m  each;  (ii)  AALI  to  extend  a  shareholder’s  loan  of IDR296bn  (approximately  RM81.2m  at  an  exchange  rate  of RM1=IDR3,642)  to  JV  Co;  and  (iii)  issuance  and  allotment  of  68,500 and 75,000 new JV Co shares at par in favour of KLKPH (approximately RM18.8m to be paid by capitalizing its existing shareholder’s loan) and AALI (approximately RM20.6m to be paid in cash) respectively. (Source: Bursa Malaysia)

Comment: JV Co is involved in the business of refining palm oil through the  Dumai  refinery,  which  has  a  capacity  of  2,000MT  per  day.  The refinery  just  commenced  operations  recently.  Based  on  270  operating days  and  a  refining  margin  of  5%,  we  estimate  a  potential  PAT  of RM50m  from  the  refinery.  We  hence  do  not  expect  the  JVA  to significantly  affect  our  FY14-16  forecasts.  The  JVA  will  however  allow high  and  efficient  production  of  refined  products  as  AALI  produces approximately 1.3m MT of CPO a year. The JVA will also enable JV Co to leverage on AALI’s penetration of the Indonesian domestic market as well as export markets.

KLK’s share price has rebounded significantly from recent low of around RM20.00 to RM22.86. Our BUY recommendation with a target price of RM23.04 is under review pending the release of the 4QFY14 results on 19 November 2014.

Source: Affin Hwang Capital Research - 11 Nov 2014