KLK-BPlant merger likely to be accretive over the longer term as operational efficiency picks up - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THERE were two notable merger & acquisitions during the week. First up is KLK which is planning to buy a 33% stake in Boustead Plantation (BPlant) for RM1.146 billion or RM1.55 per share.

Once the sale is done, KLK together with Boustead Holdings and Lembaga Tabung Angkatan Tentera will jointly extend a Mandatory General Offer to acquire the rest of BPlant shares at RM1.55 per share as well and delist the company.

In my opinion, the acquisition is likely to be earnings neutral or slightly dilutive in the short term as KLK will be using a mix of borrowings and internal funds to finance the acquisition but is likely to be accretive over the longer term as BPlant operational efficiency picks up.  

Meanwhile Sime Darby Berhad will also be acquiring a 61.2% stake in UMW Holdings Berhad (UMWH) from Permodalan National Berhad for RM3.57 billion or RM5.00 per share.

Once the agreement becomes unconditional, Sime Darby will also make Mandatory General Offer to acquire the rest of the 38.8% stake in UMWH and delist the company from Bursa Malaysia.

The acquisition will make Sime Darby the largest player in the local automotive sector with an estimated market share of around 60% of the total industry volume as it adds Toyota and Perodua to its existing portfolio of auto brands which includes BMW, Mini, Rolls-Royce, Ford, Audi and Porsche.

Besides being earnings accretive by 9% per annum, the deal will also help to balance its earnings profile to 30:30:30 from the current 15:37:35 from the Malaysia: China: Australian regions.

The KLCI Index was generally locked in a consolidation mode over the past week given the mixed 2Q2023 corporate results announced. The companies in the travel & gaming sector showed improved results but the plantation sector companies reported much weaker results due to lower selling prices for both crude palm oil & palm kernel as well as higher crude palm oil production costs.

In addition, foreign investors were generally net sellers throughout the week albeit on a much lower volumes than the earlier week. In the coming week, we may see similar performances by the market as the bulk of the 2Q2023 corporate earnings will be released. Given the uncertain market sentiments, I am maintaining my view that the KLCI Index will continue to consolidate between 1,430-1,475 points in the coming week.     

The 10-year MGS bond yields remains robust despite the widening interest rate differential against the UST 10-year yields. I attribute the performance to strong demand from local institutional investors as they park their new monies into the local bonds.

I am also maintaining my expectations for yields to remain close to the 4.00% level in the short to medium term given the yield gap and the fact that the US Federal Reserve is only looking to cut interest rates in the first half of 2024 at the earliest following the Jerome Powell’s latest speech at the conclusion of the US Federal Reserve annual retreat at Wyoming.

The Ringgit performed according to my expectations last week and is likely to remain within a tight band in the next few weeks until the next round of central banks’ meetings across the world in mid-September 2023. The intensity of the portfolio flows has also declined substantially which also brings down the foreign exchange volatility.

Therefore I am maintaining my expected trading band for the local currency against the USD to between RM4.55 – RM4.70. - DagangNews.com