KLK has proposed to acquire from IJM, its 56.2% stake in IJMP for RM3.20/share (including 10 sen DPS), which should trigger a MGO once completed. Valuation of RM54k/planted ha, is still fair though not as attractive as we had initially expected (RM44-47k). Synergy can be found in Sabah, East Kalimantan and Sumatra operations. Potential impact to KLK include (i) increase in total oil palm planted area +29%, (ii) FY22E FFB output +26%, (iii) net gearing increases to 0.42x, and (iv) FY22E CNP +9%. Reiterate OP with TP of RM25.10 @ CY21E PER of 23x (-1.0SD). ESG score is 78%.

Proposed acquisition of IJMP. Kuala Lumpur Kepong (KLK) has made an offer to acquire the entire 56.2% stake held by IJM Corp (IJM) in IJM Plantations (IJMP) for a total consideration of RM3.20/share or c.RM1.58b (including RM0.10 DPS payable to IJM on 30 July 2021). The offer is valid until 11 June 2021, 5.00pm. Should the offer be accepted, it would trigger a MGO (33% threshold) and we believe KLK intends to acquire the entire 100% stake in IJMP.

Still a fair price. The offer price of RM3.20 (including 10 sen DPS) is a premium to RM2.50-2.70 quoted by theedgemarkets. That said, it is still a fair price as it translates into an EV/planted Ha of c.RM54k (in line with market price). To put things into perspective, IJMP’s estates are located in Sabah (41%) and Indonesia (59%) with an average EV/planted Ha of c.RM80k and c.RM40k, respectively – giving the aggregate estates an average c.RM56k market price. When compared against the KLK’s previous East Kalimantan acquisitions (RM44k & RM47k), IJMP’s c.RM54k can be justified by its Sabah estates premium. We believe there is synergy, as both IJMP and KLK have operations in Sabah, East Kalimantan, and Sumatra.

Potential impact to KLK. Assuming KLK succeeds in acquiring 100% stake in IJMP with a 30:70 debt equity ratio, we estimate increase in KLK’s: (i) total oil palm planted area to c.274k ha (+29%), (ii) FY22E FFB output to c.5.4m MT (+26%), (iii) net gearing to 0.42x (from 0.23x), and (iv) FY22E CNP by c.9%. Consequently, KLK’s FY22E PER and PBV valuation would be lowered to c.18x and c.1.7x respectively.

No changes to FY21-22E CNP pending completion of corporate exercise.

Reiterate OUTPERFORM with an unchanged TP of RM25.10 based on CY21E PER of 23x (in-line with large cap peers’ average), reflecting -1.0SD valuation. Based on our ESG scoring, KLK ranks third with a score of 78%, while IJMP scores 74%. Risks to our call are: (i) sharp decline in CPO prices, and (ii) a precipitous rise in labour/fertiliser/transportation costs.

Source: Kenanga Research - 10 Jun 2021