PETALING JAYA: The RM1.5bil proposal by Kuala Lumpur Kepong Bhd (KLK) to acquire IJM Corp Bhds plantation division is a win-win deal for both parties.
If the takeover bid materialises, KLKs oil palm planted area size would expand by more than a quarter and increase its production capacity, while IJM Corp would be able to monetise its plantation asset at a higher valuation amid the crude palm oil (CPO) upcycle.
The additional cash in hand would also beef up IJM Corps war chest for upcoming major projects, especially private finance initiative (PFI)-related projects, according to analysts.
Earlier this week, IJM Corp received a cash offer from KLK to acquire its entire 494.9 million shares or a 56.2% stake in IJM Plantations Bhd (IJMP) for RM3.10 per share, or a total consideration of RM1.53bil.
Hong Leong Investment Bank Research said the offer price was fair and represented an 18.8% premium to its target price on IJMP.
The offer price is also at a 78% premium to IJMPs three-year historical average share price.
MIDF Research described the RM3.10 price as attractive, above its valuation of RM2.62.
An IJM plantation – File pic
We recommend IJMP to accept the offer as we think the proposed exercise is a great opportunity for IJMP to cement its position as one of the big players in the local plantation sector, it said in a note yesterday.
The research house believes that IJM Corps potential disposal of IJMP comes at an opportune time, given the high CPO prices above the RM4, 000-per-tonne mark currently.
This enables the group to be a more competitive bidder in larger construction and infrastructure projects, such as the PFI that is being increasingly explored by the Malaysian government moving forward, in which the contractor is expected to have a strong balance sheet.
For instance, the group could significantly improve its net gearing to about 0.31 times from 0.44 times, assuming the entire sales proceeds are allocated to pare down debts, stated MIDF Research.
Echoing a similar view, Kenanga Research expects IJM Corp to make potential gains of RM727mil from the equity interest sale and the fresh proceeds could be channelled to spearhead PFI-related projects.
It would shore up IJM Corps current outstanding order book of RM4bil, given the governments weaker fiscal position post Covid-19 pandemic.
Note that the current order book has shrunk from its peak order book of RM8.8bil registered in financial year 2019 (FY19).
While some proceeds could be earmarked for PFI, we still believe there is room for special dividends to be made.
Historically, IJM Corp has paid out special dividends after recording gains from their asset disposals, according to Kenanga Research.
On the part of KLK, Maybank IB Research said the acquisition is long-term positive for the plantation giant, considering the scarcity of land for future expansion.
However, the research house is short-term neutral on the deal as earnings accretion is likely to be negligible in the short term.
IJMP has 61, 277ha of oil palm planted area spread across Malaysia (41%) and Indonesia (59%), with an average age profile of 11.8 years and fresh fruit bunch (FFB) yield of 19.3 tonne per ha in FY21.
IJMPs planted area is about 29% of KLKs existing oil palm planted area of 213, 411ha, and IJMPs FFB output is about 27% of KLKs output, it said.
Meanwhile, MIDF Research said that KLKs planted area in Malaysia will edge up by 25.9% and 29.8% in Indonesia, post-acquisition.
This would make KLKs total planted area way larger than its peers, namely, IOI Corp Bhd and Genting Plantations Bhd, according to MIDF Research.
The larger planted area could lead to potential annual earnings expansion of between 10% and 12%, assuming KLK acquires up to 100% of IJMP, whereas in a scenario where the acquisition is limited to the initial 56.2%, the annual earnings expansion for KLK is estimated to be between 6% and 9%.
On top of that, synergy could be achieved from various factors such as cost reduction (on the back of economies of scale from buying a larger amount of fertilisers), combined talent and technology and earnings enhancement, the research house added.
UOB Kay Hian Malaysia Research also concurred that it is a strategic acquisition for KLK, given that IJMPs landbank is close to its operations in Sabah and Indonesia.
The research house expects the proposed acquisition to bring KLK plantation trees age profile down as most of IJMPs estates are in their prime.
KLK and IJMP also have a joint-venture downstream project in East Kalimantan, which is likely to commence groundwork this year, it said.
Yesterday, shares in IJMP rose to the highest level in four years as investors responded positively to KLKs takeover bid.
Adding to the optimism are the opinions of analysts, who have said that KLKs takeover bid should be accepted, given the fair and attractive offer.
IJMP was the second-biggest gainer on Bursa Malaysia yesterday, after the stock surged 60 sen or 24.39% to RM3.06 per share. Volume traded also jumped to a multi-year high.
KLKs offer is valid until today. IJM Corp has agreed in principle to accept the offer.
Upon the purchase of the 56.2%, KLK will have to extend a mandatory offer for the rest of IJMPs minority shareholders.
TA Securities Research said it was not surprised by the news of the proposed acquisition as the market has been talking about the merger and acquisition of IJMP since 2018.
On the other hand, KLK has been actively looking for a new potential takeover target after its unsuccessful RM2.3bil bid to takeover M P Evans Group Plc in 2016, it added.
