The proposed strategic collaborative agreement between KLK and BPLANT announced in Aug 2023 has been officially called off. It is short-term positive (c.5% to earnings) to KLK but does hamper its long-term expansion plan. We believe it will continue to look for upstream and downstream opportunities. We maintain our forecasts, TP of RM24.50 (15x FY24F CEPS) and OUTPERFORM call.

MGO for Boustead Plantation (BPLANT). Under a strategic collaboration with Boustead Holdings Bhd (BHB) and Lembaga Tabung Angkatan Tentera (LTAT), KLK announced on 24 Aug 2023 an offer to buy a 33%+1 share stake in BLANT from BHB for RM1,146m or RM1.55 per share. KLK would then trigger a Mandatory General Offer (GO) for the remaining BPLANT shares to eventually reach 65% with LTAT/BHB holding on to the 35% in BPLANT they already owns. The acquisition valuation was 1.3x P/NTA and RM56K per planted Ha which is reasonable. However, the additional borrowing costs would have drag KLK’s FY24-25F earnings down by c.5% but long-term value should emerged beyond FY25 as old BPLANT estates are revived.

Termination of the strategic collaboration agreement, LTAT will now undertake the MGO at RM1.55 Both KLK and BPLANT announced that the proposed collaboration announced on 24 Aug 2023 has been terminated. This was not a total surprise as the signing of the agreement had been postponed twice, initially from 11 Sept to 22 Sept and then again to 6 Oct. The impact on KLK is mildly positive in the near term as weak BPLANT’s earnings is expected over FY23-24 and KLK would have to bear additional borrowing costs.

However, KLK has paid RM229m deposit for the 739m shares or 33% stake in BPLANT and also bought c.70m BPLANT shares at RM100m from the open market. With the termination, KLK will get its deposit back. Instead of KLK, LTAT will now step in and undertake the MGO for BPLANT at RM1.55 per share..

Still in acquisition mode. After acquiring IJM Plantations, KLK’s net gearing rose to 54% in 2QFY22 but has since moderated to 47% as of end 3QFY23. With forward CPO prices expected to stay rangebound, net gearing should continue to moderate further over FY24. KLK already paid about RM350m to control Temix Oleo, a specialist in natural or bio-based chemicals including bio-lubricants. The proposed acquisition of BPLANT also reveals the appetite for sizeable acquisitions, taking on net gearing of up to 55-60% with tolerance for short-term dilution to earnings as it takes a 5 to 10-year view of its upstream and downstream businesses.

Maintain core EPS of 118.3 sen and 156.0 sen for FY23F and FY24F, respectively, but FY24F net profit has been lowered by RM60m to reflect potential impairment of the BPLANT shares it holds. NDPS of 50.0 sen is also maintained for FY23/FY24.

Maintain OUTPERFORM, FY23-24F CNP along with TP of RM24.50 which is based on 15x FY24F PER and in-line with the historical rating for integrated players, and at a 5% premium for its 4-star ESG rating. Given its good track record, defensive balance sheet and expansionary mode, KLK remains our sector pick.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices, and (iii) production cost inflation.

Source: Kenanga Research - 5 Oct 2023