Investment Highlights

• Maintain SELL on Kuala Lumpur Kepong (KLK) with a higher fair value of RM23.45/share (vs. RM22.65/share previously). We have used KLK’s FY20F EPS to arrive at its fair value of RM23.45/share instead of FY19F. We have assumed an unchanged PE of 27x on KLK’s FY20F EPS of 86.9 sen.

• We reduce KLK’s FY20F net profit by 4.7% to account for weaker EBIT margins in the plantation (upstream and downstream) and manufacturing (mainly oleochemical) divisions. We believe that rising production costs would erode EBIT margin in the plantation division. In the manufacturing unit, weak selling prices are expected to exert downward pressure on the EBIT margin.

• Plantation is estimated to account for 58% of KLK’s EBIT in FY20F while manufacturing is expected to account for another 38%. Property is envisaged to make up the balance 4% of KLK’s FY20F EBIT.

• We have assumed that KLK’s FFB production would improve by 4.5% in FY19E (1HFY19: 5.6%) and 2.0% in FY20F. We believe that KLK’s FFB output in Indonesia would climb by more than 10% in FY19E while in Malaysia, FFB production is expected to be flat. Indonesia is expected to account for half of KLK’s FFB production in FY19E.

• We understand that weather conditions in KLK’s oil palm estates in Indonesia and Malaysia are favourable presently. There is ample rainfall in KLK’s oil palm estates in Sumatra and Kalimantan. Although it has been dry in Sabah in the past few months, rains have started arriving.

• We believe that KLK’s ex-mill group production costwould be flat at RM1,370/tonne in FY19E compared with RM1,370/tonne in FY18. After rising by about 20% in FY18, KLK’s fertiliser costs are expected to stagnate in FY19F.

• We believe that KLK would continue acquiring assets this year. It is not known if the group would be interested to acquire Sime Darby Plantation’s oil palm estates in Liberia.

• Currently, KLK has 7,888ha of planted areas in Liberia while Sime Darby Plantation has 10,442ha. KLK has gross cash of RM1.47bil as at end-Dec 2018. Last year, KLK acquired 7,500ha of oil palm estates in Kalimantan for US$80mil cash (RM312mil).

Source: AmInvest Research - 17 Apr 2019