Bimb Research Highlights

Author: kltrader   |   Latest post: Wed, 14 Oct 2020, 5:45 PM


Kuala Lumpur Kepong - Buying 90% Stake in Indonesia Oil Palm Company

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  • KLK’s Taiko Plantations Pte. Ltd (TPPL) has entered into two Conditional Shares Sale and Purchase Agreement (“CSSPA”) with subsidiaries of TSH Resources Bhd (TSH) to acquire 90% equity interest in PT Farida Bersaudara (“FB”) and PT Teguh Swakarsa Sejahtera (“TSS”) for a total cash consideration of USD 110.1m (or approx. RM458.67m)
  • We are positive on this deal as this would expedite KLK’s upstream expansion in Indonesia with greater economies of scale and operational synergies – as some planted/plantable area of FB land and TSS land totaling c. 17,610ha would make up sizeable c. 27.6k ha (+10k ha KLK’s existing estates), all located at the same place in Kutai Barat, Kalimantan Timur.
  • Maintain HOLD with unchanged earnings forecast and Target Price of RM23.10.

Details of proposal

Based on the announcement, KLK’s wholly-owned subsidiary, Taiko Plantations Pte. Ltd has entered into 2 conditional agreement (CSSPA) with TSH’s subsidiaries i.e. FB and TSS, to acquire free from all encumbrances, 1) 65.7k ordinary shares of total nominal value Rp.65,700,000/each or equivalent to 90% equity interest in FB for cash consideration of USD76.7m; and 2) 139.5m ordinary shares of nominal value Rp.139,500,000/each or equivalent to 90% equity interest in TSS for cash consideration of USD33.4m. The proposed acquisition is expected to be completed in the 1st quarter of 2021.


According to the announcement, the proposed acquisition is in-line with KLK’s long-term strategy to increase its interest in the palm oil upstream business. The proposed acquisition, in our view, will 1) increase KLK group’s combined plantation landbank in Malaysia and Indonesia – by 22,975ha to approx. 300k ha; 2) expedite KLK group’s upstream expansion in Indonesia as some of 10,816ha of the Hak Guna Usaha (HGU) Land are planted – raising total planted area in Indonesia to 125,961ha (115,145ha as at Sep 2019), with 60 MT/hour palm oil mill situated on FB land; and 3) contribute positively to the Group’s earnings as well as shareholders’ value in the future.

Financial effects

The proposed acquisition is not expected to have any material effects on earnings, EPS, gearing and net assets of KLK’s in FYE20. According to the announcement, the proposed acquisition will be funded by a combination of KLK’s existing cash reserve, and bank borrowing. The cash consideration of RM458.67m is about 19% of KLK’s cash in hand as at end-June 2020. Assuming 50% of the acquisition is funded via borrowing, the groups’ gearing level is estimated to increase from 39% to 43% with KLK’s cash and cash equivalent reduced from RM2.39bn to RM2.16bn with borrowing at RM6.81bn.

Acquisition is fairly priced. Given scarcity of strategically located plantation land in Malaysia and Indonesia, we are positive on the acquisition as the deal would expedite the group’s upstream expansion, raising KLK’s total planted areas to approximately 224ha with long-term earnings growth potential. The deal comes to an approximate Enterprise Value to planted/plantable hectare of RM39k/ha (assuming 50% paid by debt), which we view as fair for brownfield with 90% equity stake that comes with 60mt/hour palm oil mill. This is comparison to the land costs in South Sumatera which they acquired in April this year with equity stake of 60% of about RM40k/ha.

Maintain forecast. We make no changes to our earnings forecast. Maintain HOLD with TP of RM23.10, based on FY21’s P/B of 2.23x and historical 3-yrs average BV/share of RM10.36. We remain optimistic on KLK’s long-term earnings growth prospect although weak production and higher costs are expected to continue to be a risk to KLK’s earnings in the near term.

Source: BIMB Securities Research - 27 Aug 2020

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