Hot Stock KLK drops 1.5% on African expansion

by **Cals** Fri 08 Nov 2013, 13:42

Hot Stock KLK drops 1.5% on African expansion

Business & Markets 2013

Written by Jeffrey Tan of theedgemalaysia.com

Friday, 08 November 2013 11:49

KUALA LUMPUR (Nov 8): Kuala Lumpur Kepong Bhd declined 1.5% in share price after it entered into an agreement yesterday with Biopalm Energy Limited (BEL) to buy plantation landbank in Africa.

The agreement with Singapore’s BEL will see KLK buying Liberian Palm Developments Ltd (LPD) and Equatorial Palm Oil Plc (EPO) for RM67.7 million.

The political risk in Africa was highlighted by some analysts today.

At 11.29 am, KLK was traded at RM23.22, after falling 18 sen or 0.8% on trades of some 24,700 shares. It was among the top losers. Earlier, it had fallen to RM23.04.

Affin Investment Bank Research estimated a negative impact of RM7 million on KLK’s net profit equivalent to 0.6% of its FY14 forecast of RM1.249 billion, if the FY12 losses of African firms continue.

Affin IB research analyst Ong Keng Wee noted there is only 3,750 hectares planted to date with stated plans to develop 5,000 hectares per annum.

“It is likely that LPD and EPO will continue to incur losses in the next few years even though there are avenues to cut costs,”said Ong.

According to him, EPO recorded operating losses of US$1.91 million (RM6.1 million) in FY11, US$1.93 million (RM6.15 million) in FY12 and US$0.96 million (RM3.1 million) in 1HFY13, after incorporating its share of LPD’s losses.

“That said, KLK’s strategy of securing landbank in PNG and Liberia is prudent in view of the shortage of land in Malaysia and increasingly scarcity of land in Indonesia,” he said.

Ong said he is maintaining ‘reduce’ call on KLK with unchanged TP of RM19.46.This is based on a CPO average selling price forecast of RM2,700 per metric tonne and target CY14 price earnings ratio of 16 times.

Meanwhile, Kenanga Research said it is neutral on the deal.

While the deal is expected to expand KLK landbank by 10% to 274,641 hectares, this is neutralised by the political risk in Liberia, it said.

“We maintain ‘market perform’ on KLK at RM23.40 with unchanged target price (TP) of RM21.50,” said Kenanga research analyst Alan Lim Seong Chun.