Friday 5 October 2012

Kuala Lumpur Kepong- Hello PNG!


THE BUZZ
 KLK is purchasing a 51% stake in 44,342 ha of greenfield plantation land in Papua New Guinea (PNG) for a consideration of RM26.9m. Its parent company, Batu Kawan, will take up an 18% stake in the venture.
OUR TAKE
 A positive step. We are positive on the acquisition for the following reasons:
  1. Of the sizeable 44.3k ha, 27.5k is contiguous while the balance is only 10km away. This means the group should be able to achieve huge economies of scale. Also, upon completion of planting, this acreage will raise KLK’s planted area by 19%, assuming only 80% of the land is plantable.
  2. Valuation is inexpensive at USD383 per ha.
  3. New planting in Indonesia is becoming increasingly difficult in view of the current moratorium hence KLK needs a new growth area beyond Indonesia.
  4. As the land’s location in PNG’s Northern Province is relatively near the sea, poor infrastructure is less of an issue in shipping palm oil. Being a distance from the highlands, the population here should be more “civilized”.   

KLK has what it takes. While the operating environment in PNG is tough, as evidenced by the exit of other players in the oil palm space, we believe that KLK has the size and expertise to successfully pull off its expansion in this country. Note that KLK is currently the most successful Malaysian oil palm planter in Indonesia. Moreover, the group’s balance sheet is not burdened by debt, at a net gearing of 7.4%. Assuming the cost of USD7k entailed in developing each hectare to maturity and all capex is paid upfront, KLK’s portion of the project cost will amount to USD135.2m. This will only raise its net gearing to 13.6%, which is still a very comfortable level.
Virtues of PNG. PNG has its plus points, among which are:
  1. Unlike Malaysia’s windfall tax or Indonesia’s export duty, PNG does not impose any measures to reduce plantation companies’ gains arising from higher palm oil prices.
  2. Instead, being part of the Cotonou Convention, agriculture produce from PNG can enter the EU without being taxed.
  3. PNG, which adopts the English legal system, accords more protection to land titles.
  4. Its volcanic soil and high rainfall produce bountiful yields.
Short lease not an issue. Of the 44.3k ha, 86% are on 49-year sublease expiring in August 2061. We are not too concerned about this since such duration is sufficient for two planting cycles. This is especially so since oil palm trees here reach full maturity earlier than those in Malaysia or Indonesia and are typically replanted at 22 or 23 years of age due to their excessive height.
Maintain Buy on KLK. We make no change to our forecast as the project will take three to four years before making any positive contribution to KLK’s bottomline.
Source: OSK

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