Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a fair value of RM24.40/share, based on a FY21F PE of 27x. We forecast KLK’s gross DPS to be 50 sen in FY20E, which implies a yield of 2.2%.

• KLK’s plantation division (upstream, palm refining and palm kernel crushing) is estimated to account for 56% of group EBIT in FY20E while manufacturing (mainly oleochemicals) is envisaged to account for another 32%. Property and others (mainly wheat and cattle farming in Australia) are anticipated to make up the balance 12% of KLK’s FY20E EBIT.

• We have assumed that KLK’s FFB production would fall by 5.0% in FY20E (9MFY20: -5.5%) compared with an increase of 4.5% in FY19. We believe that most of the YoY decline in FFB output took place in Sabah in 9MFY20. We reckon that KLK’s Indonesia division recorded a small YoY increase in FFB production in 9MFY20.

• Currently, there are no hotspots at KLK’s oil palm estates in Indonesia. There is no haze yet. So far, rainfall is sufficient. KLK’s plantation personnel in Indonesia are vigilant in monitoring conditions at the group’s own estates and neighbouring estates.

• Also, KLK is not facing any shortage in labour currently. In any case to prepare for upcoming peak CPO production, KLK is training some non-harvesters to harvest FFB on young oil palm trees.

• In the manufacturing segment, we believe that KLK is seeing a recovery in the demand for non-healthcare oleochemical products. During the lockdown in Europe and China in 1Q2020, we reckon that demand for KLK’s non-healthcare oleochemical products fell by 20%.

• Still, we think that operating profit margin of the oleochemical segment may be thin in 2HFY20 as stiff industry competition exerts downward pressure on selling prices.

• We have assumed an EBIT margin of 4.5% for KLK’s manufacturing division in FY20E vs. 5.0% in FY19. We forecast KLK’s manufacturing EBIT to ease by 14.0% to RM373.5mil in FY20E.

• KLK’s balance sheet is healthy. We forecast net gearing to be 28.0% as at end-September 2020 compared with 27.2% as at end-September 2019. Gross cash is expected to exceed RM3.6bil as at end-FY20E

Source: AmInvest Research - 16 Jul 2020