News  According to The Wall Street Journal, Equatorial Palm Oil (“EPO”) has confirmed to London Stock Exchange that it is in early stage discussions with Kuala Lumpur Kepong (“KLK”) regarding the funding of EPO joint venture (“JV”) in Liberian Palm Developments Ltd. We gather that the details have not been finalised, but it may lead to an offer of funding for the JV. It is also possible that KLK may make an offer for all or part of EPO. However, KLK has not made any announcement on this matter to Bursa Malaysia.

 Note that EPO is an oil palm plantation Company listed in London Stock Exchange with total market cap of GBP12m or RM60m. We gather that EPO owns 168,948 ha of concession plantation land in Liberia, West Africa. EPO is still a new plantation Company with its first 1,200 ha of planting undertaken in 2011 with a planned long term planting rate of up to 5,000 ha. Hence, we believe the actual planted area should be less than 11,000 ha as of now.

Comments  We are NEUTRAL on the news pending the actual pricing and the outcome of the corporate structure resulting from this potential JV or takeover. If the deal materialise, this will be KLK’s first upstream venture into Africa and this should bode well for its long-term growth strategy.

Outlook  Short term share price upside should be minimal due to low CPO prices currently.

Forecast  Maintain FY13E core earnings of RM960m and FY14E core earnings of RM1.23b.

Rating   MAINTAIN MARKET PERFORM

While we are positive on KLK long term outlook due to its disciplined management, there is lack of near term excitement as next quarter earnings unlikely to beat market estimates due to low CPO prices.

Valuation  No change to our TP of RM21.50 which is based on an unchanged Fwd. PER multiple of 18.4x on CY14E EPS of RM1.17.

Risks  Lower than expected CPO prices

 Lower than expected downstream margin. 

Source: AmeSecurities