Kuala Lumpur Kepong Bhd
(Nov 11, RM22.92)
Maintain “neutral” with a target price (TP) of RM21.30: Kuala Lumpur Kepong (KLK) has entered into a joint venture with PT Astra Agro Lestari Tbk (AALI), in which KLK will dispose of its 50% stake in its subsidiary PT Kreasijaya Adhikarya (JV Co), a company which owns a 2,000-tonnes-per-day refinery in Dumai, Indonesia.

This transaction is conditional upon fulfilment of certain conditions including the execution of a loan agreement between AALI and JV Co for the extension of a shareholders loan for 296 billion rupiah (RM81.2 million) by AALI, and an increase in the authorised share capital of JV Co, as well as the issuance and allotment of 68,500 and 75,000 new JV Co shares of 1 million rupiah each in favour of KLK and AALI, respectively.

All in, AALI’s outlay for the 50% stake in JV Co is approximately RM101.8 million.

Pricing-wise, we estimate that KLK is selling its 50% stake in its Dumai refinery for RM308 per tonne, which is in-line with the current replacement cost and industry averages.

We highlight that KLK’s Dumai refinery is relatively new and started operations in September 2014. AALI has no refinery in Sumatra and having AALI as a 50% partner will ensure that the refinery gets to full utilisation immediately.

With the peak season almost over, we believe crude palm oil (CPO) prices have a window of opportunity to strengthen between now and the first half of 2015 — which would bode well for plantation companies like KLK with decent sensitivity to fluctuations in CPO prices. We estimate that every RM100 per tonne change in CPO price could affect KLK’s net earnings by 4% to 6% per annum.

We maintain our sum-of-parts-based TP of RM21.30 and our “neutral” recommendation. — RHB Research Institute, Nov 11

This article first appeared in The Edge Financial Daily, on November 12, 2014.