KLK has completed the acquisition of two plantation assets from its parent company. Additional disclosures revealed a sharperthan-expected YoY drop in the latest financial year versus our estimate, However, given the unit’s past profits, we expect its earnings to normalise in FY24-25. Overall, we welcome the consolidation of all its parent’s upstream plantation assets under KLK. The purchase should still be marginally accretive (+1%). Maintain FY24-25F forecasts, TP of RM24.50 (15x FY24F CEPS) and OUTPERFORM call.

Background. KLK announced on 14 Dec 2023 the plan to acquire two estates from its parent, Batu Kawan Berhad (BKB). Since then, KLK has acquired the assets from Whitmore Holdings Sdn Bhd (WHSB) for RM277m in cash. KLK is a 48% subsidiary of BKB while WHSB is 100% owned by BKB. The two estates are located at Berau, East Kalimantan and are held by the following two subsidiaries:

a) 92% PT Satu Sembilan Delapan (SSD) which owns 5,676 Ha, ofwhich 5,384 Ha has been planted. SSD is RSPO-certified; thepalm trees are at their prime (9-16 years of age), and it operates a60MT per hour palm oil mill. In its annual reports, BKB haddisclosed SSD’s PBT of RM29m in FY21 and RM34m in FY22.However, KLK revealed a much lower FY23 net profit of onlyRM6m for SSD versus our net profit estimate of RM20m on anexpected PBT of RM28m for SSD. The sharper-than-expectedYoY drop between FY22 and FY23 is not clear but barring anyunusual charges or profits, we expect FY24-25F net profit tonormalise closer to RM20m.

b) 90% PT Tekukur Indah (TI) which holds 1,497 Ha of land, with 987Ha planted up. The trees are still immature, just 1-2 years old andit is loss making. KLK also revealed TI made a net loss of(RM0.7m) in FY23 versus our estimated net loss of (RM1m).Moving forward, FY24-25F losses should shrink as the palm treeswill start bearing fruit from year 3 onwards.

Higher-than-expected FY23 PER and FY23 PBV but discount on revalued PBV remains. Besides disclosing the FY23 results for SSD and TI, KLK also revealed their respective net assets of RM80m and RM9m (after adjusting out minorities). As such, based on SSD and TI’s latest FY23 results, the historic acquisition PER and PBV would have been 55x and 3.1x compared to the sector’s 1-year forward PER of 20x and PBV of 1.1x. Nevertheless, given SSD’s better profits in the past and TI’s trees coming into maturity from FY24 onwards, we expect their combined net profit of RM19-21m for FY24-25F or PER of 13-15x. As for the high acquisition PBV, it is not uncommon for younger estates to have low net assets due to high borrowings coupled with losses in the first few years of planting. Using Knight Frank’s valuation of the two assets of RM329m (after deduction of minorities) less RM87m of debts is still 1.1x (our earlier estimate was 1.2x) versus KLK’s 1.5x PBV.

Earnings-wise, KLK is still expected 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. Firstly, KLK already manages these estates for BKB but earning only RM0.8m in fees a year. KLK also owns 15,000 Ha of oil palm plantations nearby so the acquisitions will add scale to KLK’s overall operations of 66,600 Ha in East Kalimantan. Lastly, the acquisition removes potential conflict of interests as KLK will soon be completing an integrated refinery and oleochemical complex nearby, hence will eventually be buying CPO and palm kernel from SSD and TI.

No change to FY24-25F earnings and 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 - 20 Dec 2023