KLK has entered into a SPA to acquire 95% interest in PT Putra Bongan Jaya (PBJ) which holds the titles to cultivate 11.6k hectares (ha) and location permit for 4.5k ha in Kalimantan Timur for USD80.0m (RM312.0m). We were not surprised given KLK’s previous attempts to expand its plantation area. No change to our FY18-19E CNP as we expect minimal earnings impact (<5%) although FY19E net gearing may rise slightly from 0.1x to 0.2x. Maintain MARKET PERFORM with unchanged TP of RM25.75.

Acquires interest in Kalimantan Timur. Kuala Lumpur Kepong (KLK) announced that it has entered into a Share Purchase Agreement (SPA) to acquire a 95% stake in PT Putra Bongan Jaya (PBJ) from R.E.A. Holdings plc (REA) for USD80.0m (RM312.0m). PBJ holds the right to cultivate (Hak Guna Usaha; HGU) for 11.6k ha and location permit (Izin Lokasi; IL) for 4.5k ha in Kalimantan Timur. We gather that 7.5k ha is to be planted by the completion of the acquisition, of which 810 ha will be mature and the remaining area will be immature. The transaction is expected to be completed by 3QCY18.

Minimal earnings impact. We were not surprised with the announcement, as management has previously signaled interest in expanding its plantation landbank. Given that the bulk of the acquired area is immature, we expect minimal earnings contribution in the near term. However, the acquisition should be long-term earnings positive with low additional planting investment as >50% of the acquired area will be planted by the time the acquisition is completed. Valuation-wise, we estimate a price per hectare of USD5.0k (RM19.4k), slightly higher than the historical transaction average of c.RM17.0k/ha although we think this is fair given that bulk of the area holds planting rights (HGU) which have become increasingly difficult to secure. Assuming an 80-20 debt-equity ratio, we expect FY19E net gearing to increase slightly to 0.18x (from 0.14x).

No change to FY18-19E CNP of RM1.14-1.22b. We maintain our earnings expectations as we estimate marginal earnings decrease (<5%) from the acquisition after including incremental interest cost.

Reiterate MARKET PERFORM with unchanged TP of RM25.75 based on unchanged average CY18-19E EPS of 112.5 sen applied to Fwd. PER of 22.9x. Our Fwd. PER of 22.9x is based on mean valuation basis. We believe this is fair as we expect stronger downstream performance to offset weaker CPO prices and moderate FY18-19E FFB growth (9-2% vs. sector average of 8%). Overall, we maintain our MARKET PERFORM call on KLK with good long-term growth prospects as the company continues on its steady inorganic expansion track.

Risks to our call include: weaker-than-expected production improvement, lower-than-expected downstream margins, and volatility in CPO price movement.

Source: Kenanga Research - 26 Apr 2018