Monday, April 25, 2011

KLK Disposes 40% Stake in Barry Callebaut

April 25, 2011
Price Target: RM26.11
Share Price: RM20.84

# KLK announced that it has disposed the remaining 40% stake in Barry Callebaut Malaysia (which is involved in the manufacturing of cocoa products) to Luijckx BV (a member of the Barry Callebaut group of companies) for RM117.7 milliion.

# Recall in Mar 2008, KLK disposed a 60% stake in KLKepong Cocoa Products Sdn Bhd to Barry Callebaut group for RM153.6 million, and KL-Kepong Cocoa Products was subsequently changed name to Barry Callebaut Malaysia.

# Management expects the disposal to complete by 3QFY09/11.

Financial impact
Working backwards, we note that the disposal price is at a 14.9% premium the earlier disposal in 2008.

Using the disposal gain of RM86.5 million (arising from the disposal of its earlier 60% stake) as a guide, we estimate that the latest disposal will result in a disposal gain of about RM54.8 million.

Insignificant impact to KLK, as earnings contribution from Barry Callebaut Malaysia has been minimal.

Pros / Cons
We are slightly positive on the latest development, as it allows KLK to free up its financial resources and streamline its non-core operations.

1) Sharp plunge in CPO prices;
2) Worse-than-expected weather condition that will result in lower-than-expected FFB yield;
3) Escalating production cost, in particular, production costs; and
4) Labour shortage.

FY09/11 net profit forecasts maintained for now, pending further update with management. In any case, we note that the latest disposal will not have immaterial impact to its recurring earnings apart from the disposal gain.

BUY <- ->

1) High CPO prices;
2) Rising rubber prices; and
3) Maturing tree profile.

Illiquid trading volume

Target Price remains unchanged at RM26.11 based on 18.5x CY2011 core EPS of 141.1 sen. Maintain BUY.

Source: HLeBroking

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