Brokers' take: Analysts see positives in KLK's bid for IJM Plantations

ANALYSTS are positive on palm oil giant Kuala Lumpur Kepong (KLK), IJM Corporation and IJM Plantations (IJMP), after the companies said on Wednesday that KLK has proposed to acquire IJM's entire 56.2 per cent stake in IJMP for RM1.53 billion (S$492.05 million), or RM3.10 per share, in cash.

"It is a good exit price for both IJM and IJMP shareholders," said UOB Kay Hian (UOBKH) analysts Leow Huey Chuen, Jacquelyn Yow and Afif Zulkaplly in a report on Thursday, who noted that the acquisition price comes at a slight but reasonable premium, considering that IJMP holds two parcels of land located at the port.

IJMP's East Kalimantan land is also where both KLK and IJMP have a joint venture to develop downstream operations, they added.

The offer price exceeded UOBKH's fair value estimate of RM2.80, based on market transacted prices. "We suggest shareholders take up the offer given such good pricing," they added.

While UOBKH left its "hold" call for IJM unchanged, it increased its target price to RM1.83 from the previous RM1.60. For IJMP, it provided a target price of RM3.10, up from RM2 previously, despite also calling "hold".

In a Thursday report, Maybank Kim Eng (Maybank KE) analyst Wong Chew Hann agreed that the cash offer by KLK was a "positive surprise", valuing IJMP above the brokerage's valuation.

"IJM's asset monetisation is crystalising, freeing up capital for higher yielding assets. With a cash proceed of RM1.53 billion, we expect a special dividend on deal completion," Ms Wong said.

The report noted that earnings loss form the sale of IJMP, which contributed 27 per cent in net profit to IJM in FY2021, would be offset by gain from the sale in FY2022, assuming that the transaction completes by end-March of 2022.

Maybank KE maintained "buy" on IJM with a RM2.18 target price, from 1.96 previously.

Analysts agreed that the deal would also be strategic for KLK, allowing it to expand and lower the average age of its estate without being a strain in terms of funding.

KLK said that upon execution of the agreement, it is obliged to extend a mandatory general offer to acquire the remaining IJM Plantations shares not already held by KLK.

CGS-CIMB analyst Ivy Ng said that "KLK should have no problem funding the acquisition by cash", based on its cash balance and net gearing, though the acquisition could raise its net gearing. The brokerage retains "add" on KLK with an unchanged target price of RM25.25.

UOBKH's analysts added: "Even if the general offer goes through, where KLK would need to take over the entire IJMP, we believe that KLK's cash position and funding resources are still able to take the entire stake of IJMP at RM2.73 billion."

They do not expect KLK to pay the full amount from its cash balance, instead utilising its funding resources.

CGS-CIMB's Ms Ng estimated in a Wednesday report that the potential acquisition would raise KLK's planted oil palm estates by 28.7 per cent to 274,688 ha.

Maybank KE analyst Ong Chee Ting said in a Thursday report that the acquisition is long-term positive, given the scarcity of land for future expansion. However, he added that earnings accretion is likely to be negligible in the short term.

The brokerage maintained "buy" on KLK with an unchanged RM29.60 target price.

Citi Research analyst Cheryl Tan suggested in a report on Tuesday, before the companies' announcement of the proposed acquisition, that IJMP's planted hectarage, the smallest within the brokerage's coverage, if combined with KLK's existing estates, would make the second largest planted hectarage, only behind Sime Darby Plantation's approximate 583,000 ha. This would provide economics of scale, she added.

The UOBKH analysts added that based on their back-of-the-envelope calculation, if the acquisition goes through, KLK might become the largest market capitalisation plantation company in Bursa Malaysia, with a rough market cap of RM31-31.5 billion against its current RM23.5 billion, overtaking Sime Darby Plantations.

UOBKH provided a "buy" call for KLK with a RM25 target price.

The average age of KLK's palm oil estates is 12.2 years, which would be lowered slightly with the acquisition of IJMP's estates, "in their prime" at 11.8 years.

Citi rated KLK shares as "buy", with a RM25.60 target price. Ms Tan said: "We like its consistent stream of small but attractively-priced acquisitions as a means to drive growth. Further, it benefits from strong CPO (crude palm oil) prices as production cutbacks become more widespread."

On Thursday, on the Bursa Malaysia, shares of IJM closed at RM1.95, up 2.63 per cent from when it last traded on Tuesday. Shares of IJMP closed at RM3.06, up 24.39 per cent, while KLK's shares closed up 0.18 per cent at RM21.80, since both of their shares were last traded on Tuesday.