KLK announced its intention to make a cash offer to acquire M.P. Evans Group PLC (MP Evans) in a takeover, with an effective offer price of GBP 642.25 pence, valuing the company at GBP360.5m (RM1.83b). We are near-term neutral given limited potential earnings impact, but long-term positive on its prime age profile. No change to our FY16-17E CNP pending finalization of the deal. Reiterate MARKET PERFORM and TP of RM25.00.

General offer for MP Evans. Kuala Lumpur Kepong (KLK) announced its intention to make a cash offer via its wholly-owned subsidiary KL-Kepong International Ltd (KLKI) to acquire the entire issued and paid-up capital of MP Evans, a company listed on AIM. The offer is intended to be implemented by means of a takeover offer under the UK City Code on Takeovers and Mergers. We gather that KLK is offering MP Evans’ shareholders GBP 642.25 pence per share including the interim dividend of 2.25 pence which is to be paid on or after 4th Nov 2016. The offer values MP Evans at GBP360.5m, or RM1.83b, assuming GBP/MYR exchange rate at 5.08. The deal implies an estimated current PER of 15x which is in line with small cap planters such as KMLOONG. However, we note that the MP Evans board has advised shareholders to reject the deal as “the offer was wholly inadequate and substantially undervalued the company, its unique position and its future growth potential”, which could lead to further upward revision of the offer.

Short-term neutral; long-term positive. We are near-term neutral on the proposal as we estimate limited FY17E earnings increase of c.2% after accounting for incremental interest cost, should KLK acquire 100% of MP Evans. Over the long-term, however, we think the outlook is positive given the prime average age of 9.4 years and a substantial 49% of planted area at prime age of between 6-10 years. In terms of valuation, we calculate an EV/ha of RM33.8k (USD8.1k) and EV/planted ha of RM73.3k (USD17.7k) which is slightly on the pricey side as previous transactions ranged between USD8-19k/planted area. Assuming an 80-20 debt-equity ratio, we expect the deal to increase KLK’s FY17E net gearing to 0.5x (from 0.3x), which we think remains fairly manageable. We observe that MP Evans has a fairly low net debt of GBP6.6m (RM33.7m). Further, we note that the acquisition also includes three palm oil mills, a 40% stake in Bertam Properties which owns 344ha of land, a 37% stake in Agro Muko which owns 23k ha of palm oil and rubber plantations, and a 38% stake in Kerasaan which owns 2.4kha of palm oil plantations.

Maintain FY16-17E CNP at RM1.01-1.10b pending finalization of the deal. Should the deal be successful, we expect FY17E earnings to increase by only c.2%.

Reiterate MARKET PERFORM with TP unchanged at RM25.00 based on unchanged CY17E EPS of 104.2 sen and Fwd. PER of 24.0x. Our Fwd. PER of 24.0x implies mean valuation, which we believe is fair as short-term weaker production prospect is offset by a solid downstream outlook. We maintain our MARKET PERFORM call as we expect limited short-term earnings impact on the deal

Source: Kenanga Research - 26 Oct 2016