KLK is upping its cash offer for MP Evans by 15% to GBP740 pence/share (c.RM39.80), valuing them at GBP415.4m (c.RM2.23b). We were not surprised given management's rejection of the previous offer. The higher offer exceeds previous transactions, but its current PER of 17.3x remains below small-mid-cap planters' average of 19.0x. No change to FY16-17E CNP, as well as MARKET PERFORM call and TP of RM25.00.

Increasing MP Evans Offer. KLK has announced that its wholly owned subsidiary, KL-Kepong International Ltd (KLKI) is increasing its cash offer for M.P. Evans Group PLC (MP Evans) to acquire the entire issued and to be issued share capital of MP Evans for GBP740 pence/share (c.RM39.80). We gather that the increased offer is final and is not capable of being increased, pursuant to (i) a public announcement of the existence of a new offeror or potential offeror, whether publicly identified or not; or (ii) the recommendation of such an increased offer by KLK or KLKI by the board of MP Evans. Note that the General Offer is subject to conditions as discussed in our previous report on the offer (published 26 Oct 2016). However, this may not be the final offer as we gather that the Board of MP Evans has rejected the second offer as it “very substantially undervalues the company, its unique position and its future growth potential” and "strongly urged" its shareholders to take no action in relation to the revised offer.

More to chew. The higher offer is not a surprise, as the MP Evans' board had already rejected the first offer as "wholly inadequate" and "substantially undervalued" for the company. Despite the increase, we remain near-term neutral and long-term positive on the proposal. Our estimated earnings increase is c.1% (previously +2%) after accounting for higher interest cost, while EV/ha is updated to RM41.2k or USD9.5k (previously RM33.8k or USD8.1k) and EV/planted ha to RM89.3k or USD20.7k (previously RM73.3k or USD17.7k). This brings the valuation of MP Evans higher than previous transactions of between USD8-19k/planted ha. Nevertheless, we think the pricing remains relatively fair after taking into account MP Evans' associate stakes in plantation and property businesses. Furthermore, the deal implies a current PER of 17.3x which is slightly lower than smaller planters' average PER of 19.0x. Note that we expect KLK's net gearing to increase to 0.55x post-acquisition, compared to 0.51x previously. We think this gearing level still remains relatively manageable, though the possibility of a higher offer would stretch KLK's balance sheet.

FY16-17E CNP maintained at RM1.01-1.10b pending finalization of the deal. Should the deal be successful, we expect minimal earnings change in FY17, after accounting for higher interest cost.

Maintain MARKET PERFORM with unchanged TP of RM25.00 based on an unchanged CY17E EPS of 104.2 sen and Fwd. PER of 24.0x. Our Fwd. PER of 24.0x implies mean valuation, which we think this is fair as softer short-term production prospect is offset by decent downstream performance. We retain our MARKET PERFORM call as we expect limited near-term earnings impact from the deal.

Source: Kenanga Research - 16 Nov 2016