News  Kuala Lumpur Kepong (KLK) has announced that it has entered into an agreement with Biopalm Energy Limited (BEL) to purchase the following asset: (i) a 50.0% stake in Liberian Palm Developments Ltd. (LPD) for USD17.4m, (ii) a 20.1% stake in Equatorial Palm Oil (EPO) for USD3.2m and (iii) assignment of BEL’s loans to LPD totalling USD608k. Collectively, the agreement value is USD21.3m. We gather that LPD holds 25,547 ha of landbank in Liberia with 45 years remaining in its concession.

 The rationale for the purchase is that it is in line with KLK’s strategy to expand its plantation landbank outside Malaysia and Indonesia.

Comments  The effective valuation for LPD land works out to be USD1,364 or RM4,366 per ha. Although there is no direct comparison available, we think that the pricing is fair as it represents about 13% discount to comparable Kalimantan land based on our internal estimate. We also view that the 13% discount takes into account the political risk in Liberia. Note that 3,750 ha or 15% of the 25,547 ha of LPD landbank is already planted.

 Effective valuation for EPO is also fair at USD16.1m as it is at a 12% discount to EPO latest market cap of USD18.4m. We believe the discount is justified as KLK is buying a big stake of 20.1%.

 Overall, we are neutral on the deal. While the deal is expected to expand KLK landbank by 10% to 274,641 ha, this is neutralised by the political risk in Liberia.

 We expect earnings contribution only from FY15E onwards as we think KLK may need some time to perform rehabilitation work on the estate to improve its FFB yield.

 Balance sheet impact is minimal as we expect net gearing to increase from 0.07x to 0.08x.

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

Forecast  Maintain FY13E-FY14E core earnings of RM960m-RM1234m.

Rating MAINTAIN MARKET PERFORM

 There is lack of near term excitement as next quarter earnings are unlikely to beat market estimate 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 to Our Call Lower than expected CPO prices

 Lower than expected downstream margin.

Source: Kenanga