Investment Highlights

• We maintain our HOLD recommendation on Kuala Lumpur Kepong (KLK) with a lower fair value of RM22.05/share vs. RM23.12/share previously. KLK is currently trading at a FYE9/20F PE of 26.5x vs. IOI Corporation’s FYE6/21F PE of 28.3x and SDP’s FYE12/20F PE of 39.9x.

• We have reduced KLK’s FY20F net profit by 4.7% to account for a weaker manufacturing EBIT margin. We have lowered our assumption of KLK’s manufacturing (mainly oleochemical activities) EBIT margin to 4.0% 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. The rains have returned. In Riau, KLK’s oil palm estates did not experience any rain for as long as 75 days since July 2019.

• We have assumed that KLK’s FFB production would be flat in FY20F vs. an increase of 4.5% in FY19. We believe that KLK’s FFB production growth would not be spectacular in FY20F as the group would be replanting about 11,000ha of ageing oil palm trees.

• The areas targeted for replanting of 11,000ha are about 5% of KLK’s total planted areas. Also, KLK’s FFB output in Indonesia may be affected by lagged impact of the drought, which took place from July to September 2019.

• We forecast KLK’s manufacturing EBIT to grow by 6% in FY20F on the back of a 5% increase in revenue. We expect KLK’s manufacturing EBIT margin to be flat at 4.0% in FY20F. We believe that more than half of KLK’s manufacturing earnings come from the group’soperations in Malaysia while the EU unit is the second largest profit driver of the division.

• Recently, KLK raised RM2bil from the issuance of sukuk notes. We believe that the proceeds would be used for working capital and refinancing of borrowings. KLK’s gross borrowings stood at RM4.0bil as at end-September 2019.

• Incidentally, KLK has not carried out any acquisition 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$80mil cash. PT Putra Bongan Jaya has planted areas of 7,500ha in East Kalimantan.

Source: AmInvest Research - 18 Oct 2019