News  Kuala Lumpur Kepong (KLK)’s wholly owned subsidiary, KLK Land and UEMS have proposed to jointly develop: (i) a mixed development over 500ac of freehold land at Gerbang Nusajaya on a 60:40 basis under a JV Co and (ii) a mixed development spanning 2,500ac (Phase 1) of freehold land at Senai, Kulai Jaya, Johor (Fraser Estate) on a 40:60 basis under a JV Co. KLK is the land owner of the Fraser Estate land which is valued at RM871.2m or (RM8psf). Meanwhile, the Gerbang Nusajaya land which is owned by UEMS is also similarly valued at RM871.2m (or RM40psf). The disposal of Fraser Estate Land will net KLK a gain of RM816.8m.

Comments  The Fraser Metropolis JV (GDV: RM15.0b) land is in the Senai-Skudai area located 40km away from Gerbang Nusajaya in Iskandar North. It enjoys good accessibility to highways, the Senai Airport and railway routes. The emphasis of the township will be: (i) industrialists looking for cheaper entry points for industrial properties and (ii) affordable landed residential, which is mainly targeted at the locals.

 The Gerbang Nusajaya JV (GDV: RM5.0b) land is next to the Motorsports City. It will be a “green” mixed development with more emphasis on landed residentials which will target 50% locals and 50% foreigners.

 Rationale for the JVs – KLK has embarked on this arrangement to unlock the value of the Group’s property development potential in Peninsular Malaysia. The JV will allow KLK to leverage on UEMS’ experience on township development in Johor.

 We are positive on the earnings impact on a longer-term basis as contributions are likely to start from FY16 onwards. We believe the land price is attractive as expected project pretax margins for Fraser JV is up to 30% while Gerbang Nusajaya JV’s margins range is from 20%-25%. Additionally, the deal allows KLK’s property division to diversify away from its single exposure in Sungai Buloh, Selangor.

Outlook  Gerbang Nusajaya JV project launch is likely to be towards 2H15 over eight years. However, Fraser Metropolis JV will take some time to kick-off as it is farther from the land approval stage vs. Gerbang Nusajaya. Launch will likely be in FY17 and will last for 15 years.

Forecast  We maintain our core net profit estimates of RM1.30b and RM1.36b for FY14E and FY15E, respectively, as we think earnings impact should only materialize from FY16E onwards. No indication was given on the timeline of the recognition on disposal gain of RM816.8m but this should not affect our core earnings forecast.

Rating Maintain OUTPERFORM

Valuation  Maintain OUTPERFORM and TP of RM26.10 due to our bullish view on CPO prices where we expect CY2014 average price of RM2800/mt. Note that the key earnings driver for KLK is still in palm oil-related activities with

total EBIT contribution at 90% (Upstream: 63% and downstream: 27%).

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected margin for downstream division.

 Lower-than-expected sales and margin from property division.

Source: Kenanga