KL Kepong : MP Evans rejects KLK’s revised offer again BUY

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KL Kepong : MP Evans rejects KLK’s revised offer again  BUY

Kuala Lumpur Kepong (KLK) has raised its cash offer for MP Evans from 640 pence/share to 740 pence/share. MP Evans' board of directors and its financial advisor, Rothschild have rejected KLK's revised offer again as it "very substantially" undervalues the company and its growth potential. MP Evans will make a further announcement in respect of KLK's new offer price. In the meantime, MP Evans' shareholders were urged not to take action in relation to the revised offer. They were also urged not to sell their MP Evans' shares.  We are not excited over KLK's revised offer. We estimate that KLK would be paying about RM71,949/ha for MP Evans' planted landbank of 26,600ha in Kalimantan and Bangka. This would be above Felda Global Ventures' proposed acquisition of a 37% stake in Eagle High Plantations at US$17,400/ha (RM65,337/ha) back in June 2015.

Apart from the higher offer price, the cost of KLK's proposed acquisition has also increased due to the appreciation of the Pound Sterling against the RM. If KLK succeeds in its take-over of MP Evans based on the new offer price of 740 pence/share, we estimate that earnings contribution from MP Evans would be insignificant due to the increase in interest expense. In the announcement, KLK said that its net gearing ratio would increase from 23% to 45% due to the rise in borrowings for the financing of the acquisition. As mentioned in a previous report, MP Evans would increase KLK's planted areas by 13% to more than 236,000ha. Average age of MP Evans' oil palm trees is young, at eight years old. MP Evans recorded a cost of production of US$445/tonne (RM1,825/tonne) in 1HFY16 vs. US$425/tonne (RM1,547/tonne) in 1HFY15. Maintain BUY on KLK with a fair value of RM26.75/share. As MP Evans has rejected KLK's offer, we believe that it is unlikely that KLK would succeed in its take-over of MP Evans.

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