Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM24.40/share. Our fair value for KLK is based on a FY21F PE of 27x.

• We have raised KLK’s FY20E net profit by 4.5% to account for a higher plantation EBIT margin following the climb in palm product prices in 4QFY20. The upward revision in plantation EBIT more than compensates for the lower share of net profit in associates.

• We have reduced KLK’s FY20E share of net profit in associates (mainly 20%-owned Synthomer PLC) by more than half. Synthomer recorded a net loss of £13.1mil in 1HFYE12/20 largely due to non-operational costs amounting to £58.8mil.

• Looking ahead to FY21F, we believe that KLK’s recent upstream acquisitions would drive the group’s FFB production growth. We think that the additional mature areas from the acquired assets would offset areas taken out for replanting in FY21F.

• We have assumed that KLK’s FFB output would improve by 6.0% in FY21F against an estimated 5.0% decline in FY20E (11MFY20: -5.0%).

• We estimate the additional mature areas from the acquisitions to be more than 20,000ha while KLK’s replanting is expected to be 11,000ha to 14,000ha in FY21F. However due to the different completion dates for the acquisitions, the impact of the additional mature areas may not be felt on a full-year basis.

• Recall that so far this year, KLK has proposed to acquire planted areas of 24,922ha in Indonesia for RM859.2mil from Perak State Agricultural Development Corporation and TSH Resources (via two separate transactions).

• We forecast KLK’s manufacturing EBIT to improve by 10.5% in FY21F after falling by 8.0% in FY20E. We believe that sales volumes of non-healthcare oleochemical products are picking up after the economic lockdowns in various countries in 2Q2020.

• We do not expect the fire at KLK’s oleochemical plant at Bukit Raja in July 2020 to affect the group’s manufacturing earnings significantly. We reckon that insurance claims would be enough to cover the asset write-offs resulting from the fire. Also, KLK has said that it would be able to divert production to other manufacturing sites to meet its customers’ orders.

• We believe that the oleochemical plant has an annual production capacity of 250,000 tonnes, which is 8% of KLK’s total installed oleochemical production capacity.

Source: AmInvest Research - 23 Sept 2020