News  Kuala Lumpur Kepong (KLK) has announced that its subsidiaries, KLK Agro Plantations Pte. Ltd. (KLK

AGRO) and Equatorial Biofuels (Guernsey) Ltd. (EBGL) will each subscribe for USD7.5m or around RM24m to the share capital of Liberian Palm Developments Ltd. (LPD) on a 50:50 proportion of the shareholding. Note that KLK AGRO is 100% owned by KLK while EBGL is effectively 63.2% owned by KLK. Please refer to Page 2 for the details of the corporate structure.

 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  As 3,750 ha or 15% of the 25,547 ha of LPD landbank is already planted, we believe that the capital injection from KLK into LPD will likely be used to plant the remaining 85% of LPD landbank.

 We are positive longer term as earnings impact will likely be from FY18 onwards. Note that oil palm trees usually start bearing fruits from the 3rd year onwards and the field preparation work may take up to one year.

Outlook  The Group’s discipline in sustaining its planted area growth should bode well for its long-term FFB growth.

Forecast  We maintain our FY14E and FY15E core earnings at RM1.30b and RM1.36b, respectively as we expect earnings impact to materialize from FY18 onwards.

Rating Maintain OUTPERFORM

Valuation  Maintain OUTPERFORM and TP of RM26.10 on our bullish view on CPO prices in which we expect CY2014 average of RM2800/mt. Note that the key earnings driver for KLK is 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