KLK  has  proposed  to  buy  an  effective  60%  stake  in  Liberian  Palm Developments,  a  company  with  25,547ha  of  palm  oil  concessions. Effective  pricing  works  out  to  be  MYR4,855/ha,  which  we  believe  is reasonable and in line with other greenfield transactions in Indonesia. We  are  positive  on  this  acquisition  and  maintain  our  NEUTRAL recommendation, with a higher SOP-based FV of MYR22.40.

• Acquiring  Liberian plantation  firm.  Kuala Lumpur Kepong (KLK) has entered  into an agreement to acquire: i ) a 50% stake in Liberian Palm Developments (LPD) Ltd for USD17.43m, ii) a 20% stake in Equatorial Palm Oil  (EPO) for USD3.22m, and iii) an  assignment of LPD’s loans of USD0.608m.  Total  cash  consideration  is  USD21.26m  or  MYR68.03m.
• LPD  is  engaged  in  oil  palm plantations  in  Liberia,  holding  two  50-year concessions (45 years remaining) in Liberia totalling 25,547ha, of which 3,750ha  had  been  planted.  A  further  61,111ha  is  earmarked  for  future joint expansion with the local community. EPO  is listed on the alternative investment market of the London Stock Exchange and holds the other 50% stake in LPD. KLK has also entered into two agreements to provide funds for LPD’s immediate working capital requirements, comprising : i) a five-year  loan  of  USD2m  to  LPD,  and  ii)  a  deed  of  assignment  of liabilities  owing  to  EPO,  whereby  EPO  would  assign  USD6m  of outstanding loans to KLK for a cash consideration of USD2m.
• Acquisition price reasonable. Effectively, KLK would own 60% of LPD, including its indirect stake via EPO. Including the debt of USD2m under the  deed  of  assignment,  KLK  would  be  paying  USD23.26m  or MYR74.4m  for  this  acquisition,  or  an  EV/ha  of  approximately MYR4,855/ha  for  the  effective  15,328ha  of  land.  We  deem  the  price reasonable,  in  line  with  other  greenfield  transactions  in  Indonesia ranging  between USD700-1,500/ha. While this acquisition will not  yield profits  in the short term, we are positive on it, as KLK continues to be one of the pioneers in exploring new areas for expansion.
• Maintain NEUTRAL.  No  changes  to our forecasts. However, we  lift  our SOP-based FV  for KLK after ascribing a higher 18x CY14 P/E valuation for its plantation operations (from  16x), in line with valuations  of its bigcap  peers.  We  have  also  taken  into  account  the  cash  outlay  for  this Liberian  acquisition  in  our  SOP  calculation  to  arrive  at  a  higher  FV  of MYR22.40 (from MYR20.60). Maintain NEUTRAL. 

Recommendation Chart

Source: RHB