KLK has proposed to acquire 90% interest each in FB and TSS which collectively holds six HGUs totalling 22,375 Ha in East Kalimantan. We are surprised by the timing of the acquisition, but nevertheless positive on the strategic move. Upon completion, KLK’s planted area will increase by c.4%. Valuation of c.RM47.1k/planted Ha is broadly in-line with previous East Kalimantan transaction (2018; c.RM43.8k). Raise FY21E CNP by 4% on additional FFB contribution from FB and TSS. FY21E FFB growth is now 8.4% (vs. 4.3% previously). Maintain MP with a higher TP of RM24.00 based on FY21E PER of 30x (-0.5SD).

Acquisitions in East Kalimantan. Kuala Lumpur Kepong (KLK) announced that it has entered into a conditional share sale and purchase agreement with wholly-owned subsidiaries of TSH to acquire 90% stake each in PT Farinda Bersaudara (FB) and PT Teguh Swakarsa Sejahtera (TSS) for a total purchase consideration of USD110.1m (RM459.17m @ USD/MYR of 4.1705). FB and TSS collectively holds six rights to cultivate (Hak Guna Usaha; HGU) for a total area of 22,375 Ha in East Kalimantan, of which 10,816 Ha is planted. The HGU land also includes a 60/MT palm oil mill which supports FB’s operations. The transaction is expected to be completed by 1QCY21, funded by existing cash reserves and bank borrowings.

Positively surprised. We understand that the group has been on the lookout for brownfield upstream assets, but were surprised by the timing of the acquisition given KLK’s proposed 60% acquisition in PT Pinang Witmas Sejati, South Sumatera in April. The proposed 90% interest each in FB and TSS would effectively increase KLK’s planted area by c.5% to 192.9k Ha (before PWS), which we believe is an effective utilization of its large war chest (c.RM3.9b). Valuation-wise, the aggregate purchase consideration translates into a EV/planted Ha of c.RM47,140, which we believe is fair when compared to the group’s recent purchase of East Kalimantan plantation assets in 2018 at c.RM43,789/planted, representing a premium of 7% over 2 years. Assuming a 30-70 debt-equity ratio, we expect FY20E net gearing to increase slightly to 0.38x (from 0.35x).

Keep FY20E CNP unchanged but raise FY21E CNP by 4%on higher FY21E FFB growth of 8.4% (vs. 4.3% previously) after accounting for additional FFB contributions from FB and TSS (completion of acquisition in 1QCY21).

Maintain MARKET PERFORM with a higher TP of RM24.00 (from RM23.10)

based on unchanged FY21E PER of 30x (in-line with large cap peers’ average), reflecting -0.5SD valuation. At current price, KLK is trading at FY21E PER of 28.2x, close to -0.5SD valuation. Upside is limited at this juncture as we anticipate CPO prices to come under pressure as production rises in the coming months. Hence, we believe our MARKET PERFORM call is appropriate.

Risks to our call are sharp falls/rises in CPO prices and a precipitous rise/drop in labour/fertiliser/transportation costs.

Source: Kenanga Research - 27 Aug 2020