KLK’s proposed takeover of MP Evans operationally positive, but credit negative
KUCHING: Kuala Lumpur Kepong Bhd’s (KLK) proposed takeover of UK-listed MP Evans has been viewed by RAM Ratings as a positive move for the group’s operations.
However, it pointed out that it could also be potentially credit negative from a financial perspective, for KLK, especially due to the possibility of MP Evans’ higher leverage on KLK.
In a statement, it said, KLK’s proposed takeover of UK-based MP Evans Group PLC for 415 million pounds (or circa RM2.3 billion) is a positive development operationally given the increase in the scale of the group’s plantation business as well as the strong growth potential from MP Evans’ young estates.
“At the same time, the hostile takeoverispotentiallycreditnegative from the financial perspective especially in the event of a worstcase scenario of a full acceptance and 100 per cent debt financing,” it pointed out.
The proposed takeover would initially be financed through a bridging loan and internal cash resources.
“Assumingtheworst-casescenario of 100 per cent debt financing and a full acceptance of the offer, KLK’s debt level will increase RM2.3 billion to RM6.9 billion, pushing its gearing ratio up to 0.6 times (endSeptember 2016: 0.4 times) – beyond our downward trigger of 0.5 times.
“With MP Evans’ small earnings base, the group’s pro forma funds from operations debt cover is also estimated to deteriorate to almost 0.2 times (from 0.3 times in FY Sep 2016) under this scenario – below our threshold of 0.3 times.
“Nevertheless, the proposed takeover will only proceed if acceptance levels exceed 50 per cent. Given the rejection of a substantial number of MP Evans’ shareholders, a level of acceptance closer to 50 per cent is probable and KLK’s credit metrics could still withstand debt requirements under this scenario in view of the group’s robust cash pile,” RAM Ratings said.
As at end-September 2016, the ratings agency noted that the group had RM2 billion in cash and shortterm funds, which might be boosted to about RM2.4 billion after the takeover and can be partially used to fund the takeover.
“Upon a successful takeover, KLK could also restructure the funding mix,” it added.
Operationally, KLK’s takeover of MP Evans would be a positive development as the group’s land bank would increase by about 19 per cent or 52,500 hectares (ha), including its share of associates’ planted areas and those of smallholders.
“The locations of the estates, being close to KLK’s own estates, also improve economies of scale. About 43,000 ha of MP Evans’ land bank have been cultivated with oil palms, with a young average age of 7.9 years. Despite this, MP Evans’ CPO yield is considered strong, standing at about five metric tonnes per ha in the financial year ending December 2015.
“A young tree profile also spells strong growth potential as palms mature. Production cost, although high at US$445 per tonne of CPO and palm kernels in the first half of the financial year 2016, would improve as the estates mature,” RAM Ratings noted.
Overall, it said, the ratings of KLK and those of its parent, Batu Kawan Bhd, remained unchanged at this juncture, given the uncertainty surrounding the success and degree of acceptance of the proposed takeover after the board of MP Evans rejected KLK’s offer, supported by shareholders with a substantial stake in the company.
“Furthermore, the ultimate funding structure of the takeover remains fluid. MP Evans is an oilpalm plantation player listed on the UK’s Alternative Investment Market, with operations primarily in Indonesia,” it added.