Analysts deem KLK’s cash offer to acquire MP Evans inadequate
KUCHING: Kuala Lumpur Kepong Bhd’s (KLK) recently announced cash offer to acquire MP Evans Group PLC (MP Evans) has been deemed as wholly inadequate by MP Evans’ board.
MP Evans’ principal activity is the ownership, management and development of sustainable oil palm estate in Indonesia, it possesses a total of 41,000 hectares of plantable land of which 34,650 hectares has been planted.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) reported that the successful acquisition of MP Evans will boost KLK’s total planted area by 16 per cent to 258,176 hectares.
According to a recent filing with Bursa Malaysia, KLK’s announced that its cash offer to acquire the entire issued and paid-up capital of MP Evans would be through its wholly-owned subsidiary KLKI.
Under the terms of the offer, MP Evans shareholders will receive 640 pence in cash and are also entitled to receive the interim dividend of 2.25 pence per share. Based on this, the total valuation of MP Evans stands approximately at 360.5 million pounds.
KLK believes that this all-cash offer would be highly attractive to MP Evans shareholders as it represents a compelling value proposition with a high degree of certainty at a substantial premium to the current share price.
“Providing an opportunity to realise in full the value of their investment in the context of the low liquidity in trading of MP Evans shares,” continued the oil palm sector giant.
Based on analyst consensus estimates, MP Evans is expected to rake in earnings per share (EPS) of US$14.29 and US$11.61 for financial year 2017 (FY17) and FY18 respectively.
“As such, the acquisition price earnings ratio (PER) will work out to 54.7 to 67.6 fold of MP Evans’ forward earnings,” noted the research arm of TA Securities Holdings Bhd (TA Research).
“Meanwhile, based on the group’s net tangible assets (NTA)
Providing an opportunity to realise in full the value of their investment in the context of the low liquidity in trading of MP Evans shares. KLK
of US$312.1 million as at June 2016, the acquisition price over NTA (P/NTA) is equivalent to 2.5 fold.
This indicates that the proposed cash offer would be expensive for KLK as it trades at FY17 P/NTA of 9.8 fold and PER of 22.0 fold.
Additionally, considering the market price of palm oil land and palm oil mills owned by MP Evans, the research arm noted that the acquisition would translate to approximately 242 million pounds as compared to approximately 360.5 million on offer.
However, MP Evans’ board does not share this view as they have advised its shareholders to reject the offer as “the offer was wholly inadequate and substantially undervalued the company, its unique position and its future growth potential.”
Due to this, Kenanga Research expects that further upward revision of the offer is likely to occur in the near future.
Regarding MP Evans' future growth potential, KLK believes that there is strategic merit in synergising the operations of MP Evans with KLK’s from a geographical and capabilities perspective.
“The management of MP Evans will also have opportunities to develop their careers within the larger organisation.
“Together KLK and MP Evans should establish best practices for the further growth of both companies and enable the enlarged group to capitalise on economies of scale in the oil pal sector,” added KLK.
Industry analyst TA Research, shares this opinion as there is an overlapping of KLK and MP Evans operational locations, the research arm believes that this represents a good opportunity for KLK to expand its operations and focus on labour productivity.
Other industry analysts are mostly short-term neutral and long-term position on the potential deal with the research arm of Midf Amanah Investment Bank Bhd (Midf Research) expecting financial year 2017 (FY17) earnings to improve slightly with more to come in the future.
Meanwhile Kenanga Research estimates that after accounting for incremental interest cost of the acquisition, it estimates FY17 earnings to experience a limited increase of approximately 2 per cent.
“Over the long-term, however, we think the outlook is positive given the prime average age of 9.4 years and a substantial 49 per cent of planted area at prime age of between 6 to 10 years,” opined Kenanga Research.
Despite firm positive outlooks on the deal, KLK’s proposal is still in its early stages with not much indication of when finalisation may occur.
As such, all three industry analysts have decided to maintain their recommendations and target prices ( TP) for KLK pending finalisation of the deal.
TA Securities maintains its ‘Sell’ recommendation for KLK with an unchanged TP of RM20.05 based on sum-of-parts (SOP) valuation with a calendar year 2017 (CY17) PER of 18.2 fold; Kenanga Research maintains its ‘Market Perform’ call with an unchanged TP of RM25 based on unchanged CY17E EPS of 10.42 sen and forward; and Midf Research maintains its ‘Buy’ recommendation with a target price of Rm27.38 based on unchanged forward PE of 26.8 fold on fy16 EPS forecast of 102.1 sen.
Additionally, according to statistics from The London Stock Exchange, MP Evans shares soared to a record high, closing at 610.500 pence per share as at October 25 (GMT+1) following the cash offer announcement from KLK.
This translates to a 43.19 per cent increase from the closing price of 426.250 pence per share from the previous day.