Investment Highlights

• We are upgrading Kuala Lumpur Kepong (KLK) to HOLD from SELL as its share price has fallen below our fair value of RM23.12/share. Our fair value of RM23.12/share for KLK is based on a FY20F PE of 27x.

• KLK’s valuations are now more palatable after the decline in its share price. KLK is currently trading at an FY20F PE of 24.8x compared with Sime Darby Plantation’s FY20F PE of 38.8x and IOI Corporation’s FYE6/20F PE of 25.9x.

• In the past five years, KLK’s PE ranged from a low of 9.6x to a high of 41.5x. Average PE was 28.8x.

• KLK’s share price has slumped by 18.2% since hitting a high of RM25.98 on 12 April 2018. Apart from weak CPO prices, KLK’s 3QFY19 results were unexciting asthere was an RM146.0mil impairment on its Liberia assets. KLK’s share price took a further beating last Friday on news that a shareholder has sold its entire stake for RM21.00/share.

• Currently, we are assuming an average CPO price of RM2,200/tonne for Malaysia in 2020F vs. RM2,100/tonne for 2019E. This coupled with a 3% improvement in FFB production (FY19E: 4.5%) are expected to translate into higher plantation profits for KLK in FY20F.

• KLK’s manufacturing division (mainly oleochemical activities) has recovered from logistics issues, which affected the oleochemical unit in the EU in 1HFY19.

• Hence, we reckon that manufacturing earnings would stabilise in the coming quarters. We estimate KLK’s manufacturing EBIT to be flat at about RM430mil in FY19E. Manufacturing is estimated to account for 37% of KLK’s EBIT in FY19E.

• As for ESG (Environmental, Social and Governance) concerns, we think that KLK would prevail as the group does not practise unsustainable planting and estate management policies. More than 70% of KLK’s CPO production are RSPO-certified.

Source: AmInvest Research - 7 Oct 2019