KLK is purchasing a 51% stake in 44,342 ha of greenfield plantation land in Papua New Guinea (PNG) for a consideration of RM26.9m. Its parent company, Batu Kawan, will take up an 18% stake in the venture.

 A positive step. We are positive on the acquisition for the following reasons:

KLK has what it takes. While the operating environment in PNG is tough, as evidenced by the exit of other players in the oil palm space, we believe that KLK has the size and expertise to successfully pull off its expansion in this country. Note that KLK is currently the most successful Malaysian oil palm planter in Indonesia. Moreover, the group's balance sheet is not burdened by debt, at a net gearing of 7.4%. Assuming the cost of USD7k entailed in developing each hectare to maturity and all capex is paid upfront, KLK's portion of the project cost will amount to USD135.2m. This will only raise its net gearing to 13.6%, which is still a very comfortable level.

Virtues of PNG. PNG has its plus points, among which are:

Short lease not an issue. Of the 44.3k ha, 86% are on 49-year sublease expiring in August 2061. We are not too concerned about this since such duration is sufficient for two planting cycles. This is especially so since oil palm trees here reach full maturity earlier than those in Malaysia or Indonesia and are typically replanted at 22 or 23 years of age due to their excessive height.

Maintain Buy on KLK. We make no change to our forecast as the project will take three to four years before making any positive contribution to KLK's bottomline.

Source: OSK