KLK is buying two plantation assets from its parent company at neutral PER. Overall, the purchase should be marginally accretive (+1%) and, more importantly, makes strategic sense. KLK already manages these estates which are near to its own estates. We are nudging up our FY24-25F forecasts marginally (<1%), but maintaining TP at RM24.50 (15x FY24F CEPS) and OUTPERFORM call.

Buying two estates from parent, Batu Kawan Berhad (BKB). KLK has entered into a conditional agreement with Whitmore Holdings Sdn Bhd (WHSB) to buy two estates for RM277m in cash. BKB holds 48% of KLK and 100% of WHSB. The two WHSB estates are located at Berau, East Kalimantan and are held by two subsidiaries:

a) 92% PT Satu Sembilan Delapan (SSD) has planted 5,384 Ha outof the 5,676 Ha of land it owns. The palm trees are in their prime,at 9-16 years of age. SSD is RSPO certified and operates a 60MTper hour palm oil mill as well with a bio-gas capture facility due forcompletion in FY25. Knight Frank has valued SSD’s land bank atRM312m based on RM58k per Ha of planted area.

b) 90% PT Tekukur Indah (TI) owns 1,497 Ha of land, 987 Ha ofwhich has been planted. All the trees are 1-2 years old, hence stillimmature and loss making but most of the upfront investmentcapex has been incurred. Hence, its land bank is valued atRM44m by Knight Frank based on RM45k per Ha of planted area.

Neutral on estimated PER but discount on revalued PBV. KLK will be paying RM277m altogether for both assets. Compared to our estimated 12-month PATMI for SSD and TI combined of RM19m, the acquisition PER of 14.5x is comparable to KLK’s 14.5x FY24F PER. However, after adjusting out the 8% minority in SSD and 10% in TI, the estimated revalued PBV based on Knight Frank’s valuation of the two assets of RM328m (after deduction minorities) less RM92m of debts is about 1.2x. versus KLK’s 1.5x PBV.

Earnings-wise, KLK is set to enjoy a slight uplift (<1%) in core net profit as it plans to use part of its RM2.5b cash holding to pay for the entire consideration.

More strategic and long term than immediate. Firstly, BKB has already engaged KLK to manage these estates, hence KLK is familiar with the estates. KLK also owns 15,000 Ha of oil palm plantations nearby so the acquisitions will just add scale for KLK’s operations in East Kalimantan. Lastly, the acquisition removes any potential conflict of interests as KLK’s soon to be completed integrated refinery and oleochemical complex nearby will eventually buy CPO and palm kernel from SSD and TI.

Marginal upgrade to core EPS of 0.3% in FY24F to 147.5 sen and 1% to 165.9 sen for FY25F.

Maintain OUTPERFORM along with TP of RM24.50 which is based on 16x FY24F PER and 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 - 15 Dec 2023