RHB Research has maintained its buy recommendation for Kuala Lumpur Kepong Bhd (KLK) on the company’s 60% acquisition of a plantation in south Sumatra.
The plantation with 14,106ha of planted landbank is deemed inexpensive by the research firm at US$7,787/ha (excluding debt to be assumed), when compared to previous transactions in Indonesia ranging between US$10,000-20,000/ha.
“We are unable to assess if the acquisition will be earnings accretive, given the lack of details disclosed,” said RHB Research.
KLK’s proposed acquisition of a 60% stake in PT Pinang Witmas Sejati (PWS) from Ladang Lekir Sdn Bhd is for RM341.55 mil. The acquisition price would be adjusted on completion, based on PWS’ net debt and other balance sheet items. PWS has two Hak Guna Usaha (HGU) land titles totalling 14,980ha in south Sumatra, of which 14,106ha are planted.
There is also a 90mt/hr palm oil mill on the HGU Land, which supports PWS’ oil palm operations. The acquisition is expected to be completed in 3QFY20 and would be funded by KLK’s cash reserves and bank borrowings
Ladang Lekir is owned by Perbadanan Pembangunan Pertanian Negeri Perak (Perak State Agricultural Development Corporation or PSADC), a state statutory body. The research firm said it was unable to assess the actual pricing of the land, as the debt to be assumed has yet to be disclosed.
The plantation land is mostly flat and undulating and is of prime to old age, with FFB yields of 20-25t/ha. This acquisition will add around 6.6% to KLK’s planted landbank. At the end of FY19 (Sept 30) KLK had a net gearing of 43%, which means it still has room to gear up if need be. Assuming it funds this acquisition entirely by debt, net gearing would rise to only 45% (excluding the debt to be assumed).
RHB Research has not made any changes to the earnings forecast of KLK due to the proposed acquisition. Its target price for KLK is unchanged at RM22.40 based on the sum of parts (SOP) valuation. Its valuation comprises a 25x target P/E for its plantation unit, 15x for its manufacturing unit, and a 60% discount applied to the RNAV of its property landbank. Its P/E target is at a five-year historical average and implies an EV/ha of US$25,000 at the lower end of its peer range of US$25,000-35,000.
At 11.45am today, KLK shares were thinly traded with only 11,500 shares done. The counter was traded at RM20.32, up two sen from Friday’s close. — April 27, 2020
