Kuala Lumpur Kepong - Hedged By Oleochemical Business

Date: 07/01/2019

Source  :  PUBLIC BANK
Stock  :  KLK       Price Target  :  22.86      |      Price Call  :  HOLD
        Last Price  :  21.44      |      Upside/Downside  :  +1.42 (6.62%)

We met Kuala Lumpur Kepong (KLK)’s management and came away with some developments. Despite the weak CPO price performance, we expect to see a slow recovery in the company earnings by 2HFY19. Compared to its industry peers, KLK was not as badly affected by lower CPO prices as it has oleochemical business to hedge against the upstream price exposure. On valuation, it remains unattractive at 30x forward PER, likely owing to the integrated business model that helps hedge against the downside risk in CPO prices. Maintain Neutral call with an unchanged TP of RM22.86.

  • Outlook guidance. Management expects to see the current weak CPO price performance remains the key challenge to its 1HFY19 plantation segment. Meanwhile, oleochemical segment is expected to maintain its performance with higher capacity utilizations and operational efficiencies. It expects to see CPO prices hovering around RM2,100-2,200/mt for the next three months. On FFB production growth, management expects to see FFB production surpassing 4m mt level for FY19 with an expected growth of 5-6%. The higher production growth will be contributed by an estimated of 10,000ha of plantation area coming into maturity as well as improving yields given its young age profile of 12.1 years for the existing mature area. Property segment is expected to perform favourably this year on the back of steady unbilled sales of RM121m and ongoing project called Hemingway Residence in Bdr Sungai Buloh, which consists of superlink terrace houses and semi-detached homes.
  • More new planting activities. Though the group has a sizeable planned capex of RM900m, it intends to spend only half of it. About 70% of the capex will be spent on the plantation segment as it plans to replant a bigger area of 10,000ha in Lahad Datu and Riau compared to only 5,800ha last year due to bad weather condition and contractor issues. It also includes the construction of a joint-venture-owned new refinery and jetty in East Kalimantan. The remainder will be allocated for the capacity expansion for oleochemical business, which is currently running at maximum level.
  • Impact from minimum wage hike. Following the implementation of new minimum wage of RM1,100/mth effective this year, the group sees a small impact of -2% on its group bottomline. However, the more worrying issue is the minimum wage hike in Indonesia this year as the general election is expected to be held soon. A bumper hike of 10%-20% is anticipated, which made the general worker wages almost on par with Malaysian level.
  • Better progress in Liberia. The group has a planted area of 7,888ha in Liberia, which made up 3.6% of total group plantation area. It has started commissioning a 30mt/hour palm oil mill in Palm Bay. It is currently constructing bulking facilities at Buchanan to facilitate bulk shipment of its CPO in the future.

Source: PublicInvest Research - 7 Jan 2019

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