Kuala Lumpur Kepong Bhd
(Oct 18, RM21.50)
Maintain hold with a lower fair value of RM22.05: We have reduced Kuala Lumpur Kepong Bhd’s (KLK) financial year 2020 forecast (FY20F) net profit by 4.7% to account for a weaker manufacturing earnings before interest and tax (Ebit) margin. We lowered our assumption of KLK’s manufacturing — mainly oleochemical activities — Ebit margin to 4% from 4.8% as selling prices of oleochemical products may be pressured by stiff competition and slower demand.

 
We understand that weather conditions at KLK’s oil palm estates in Indonesia and Malaysia have improved, with rains returning. In Riau, KLK’s oil palm estates did not experience any rain for as long as 75 days since July 2019.

We assumed a flat fresh fruit bunch (FFB) production for KLK in FY20 versus a 4.5% increase in FY19, and believe an unspectacular FFB production growth in FY20 as the group would be replanting about 11,000ha of ageing oil palm trees. The targeted replanting areas are about 5% of KLK’s total planted areas. Also, KLK’s FFB output in Indonesia may be affected by a lagged impact of a drought from July to September 2019.

We forecast KLK’s manufacturing Ebit to grow 6% for FY20 on a 5% increase in revenue, and expect a flat manufacturing Ebit margin at 4% in FY20. We believe that more than half of KLK’s manufacturing earnings come from the group’s operations in Malaysia, while the European Union unit is the second-largest profit driver of the division.

Recently, KLK raised RM2 billion from issuing sukuk notes. We believe the proceeds would be used for working capital and refinancing borrowings. KLK’s gross borrowings stood at RM4 billion as at end-September 2019.

Incidentally, KLK has not carried out any acquisitions so far this year. In the past eight years, KLK has made or proposed an acquisition per year. In 2018, KLK acquired PT Putra Bongan Jaya for US$80 million in cash. PT Putra Bongan Jaya has planted areas of 7,500ha in East Kalimantan.

KLK is currently trading at FY20F (ending September)price-earnings (PE) of 26.5 times versus IOI Corp Bhd’s FY21F (ending June) PE of 28.3 times and Sime Darby Plantation Bhd’s FY20F (ending December) PE of 39.9 times. — AmInvestment Bank, Oct 18