Kuala Lumpur Kepong Bhd (KLK) CEO Lee Oi Hian and his board members should be thanking their lucky stars the agreement with the Armed Forces Fund Board (LTAT) and Boustead Holdings Bhd (BHB) to acquire a stake in Boustead Plantations Bhd (BPlant) collapsed dramatically last week.
According to Public Investment Bank (PublicInvest) Research, KLK’s unsuccessful bid to acquire a 33% stake in BPlant from LTAT and its wholly owned subsidiary BHB could potentially have saved billions of ringgit for KLK.
Various research houses are in agreement that KLK dodged a bullet when the deal fell through last Wednesday on the heels of strong political resistance.
Opposition members of parliament (MPs) have questioned why the unity government gave its blessing to LTAT to sell the stake to KLK, arguing the deal may adversely affect Bumiputera interests.
“The collapse in the acquisition of BPlant could potentially save more than RM2.85 billion for KLK. Despite a promise of RM2 billion allocation from the ministry of finance to help ease BPlant’s burden, the most crucial question is how to turn around its core plantation business,” PublicInvest said in a note last Thursday.
On Aug 24, KLK entered into a strategic collaboration agreement (SCA) with LTAT and BHB to acquire a 33% stake plus one share in BPlant for a cash payment of RM1.15 billion.
It would then extend a mandatory general offer (MGO) at RM1.55 per share to raise its shareholding to 65% and delist BPlant. LTAT and BHB, which collectively hold a total of 68%, would retain the remaining 35% stake.
Well, that was the original plan. The new plan is for LTAT to buy out BPlant at an offer price of RM1.55 per share. It will likely have to fork out RM1.11 billion for the remaining 716.8 million shares, equivalent to 32% interest, that it does not own.
Why RM3 billion savings?
In its note last week, PublicInvest did not explain how KLK could “save more than RM2.85 billion”.
However, it did provide details on how much KLK would potentially have to pay out for the deal in a note on Aug 25, following the announcement of the SCA.
The research house said approximately RM229.2 million of the purchase consideration of RM1.1 billion will be funded via operating cash flows while the remaining RM916 million will be funded via bank borrowings.
Meanwhile, the group plans to fund the entire MGO via bank borrowings, it said. This would amount to an estimated RM1.1 billion.
“As of Q2 FY2023, KLK’s coffer stands at RM2.9 billion while net gearing level is at 40.5%. Assuming it receives full acceptances under the MGO, it needs to fork out RM2.24 billon for a 65% stake,” it said, adding this will raise its net gearing level to about 58%.
That is not the end of the story. In addition to the RM2.24 billon for a 65% stake (including the 33% from LTAT and BHB), KLK also needs to fork out hefty capital expenditure to replant BPlant’s entire ageing planted area of 33,253ha.
PublicInvest said this replanting might cost about RM665 million. Add this to the RM2.24 billon for a 65% stake, and you get RM2.91 billion.
Throw in the interest cost for bank borrowings to finance the whole deal, and the figure easily touches RM3 billion.
Some may argue a RM3 billion investment sounds like a good deal given BPlant manages 42 oil palm estates and 10 palm oil mills nationwide. It also has a total landbank of approximately 97,399ha and a total planted area of 72,291ha.
Thanks for the opposition
However, some research houses beg to differ. PublicInvest said it is positive on the unsuccessful acquisition.
“The proposed acquisition not only involves a pricey valuation, there will be hefty replanting costs involved for the entire ageing planted area,” said PublicInvest.
BIMB Securities Research also flagged BPlant’s “low productivity” due to lower yield, specifically on oil yield per hectare of 2.7, which is among the least competitive within the stocks under its coverage.
In addition, its oil palm trees’ age profile signifies about 46% of them are already passed their prime age of 20 years, it said in a note.
Meanwhile, TA Research said the proposed acquisition was not going to be earnings accretive in the short-term after factoring in the finance cost and the aging oil palm age profile at BPlant’s planted area.
The research house maintained its “sell” call on KLK with a higher TP of RM21.28.
In hindsight, CEO Lee, whose father Lee Loy Seng was instrumental in making KLK one of the country’s largest plantation groups, may consider sending a “thank you” note to the opposition MPs who bashed the deal into oblivion.
The views expressed are those of the writer and do not necessarily reflect those of FMT.