Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a higher fair value of RM24.80/share vs. RM24.40/share previously. Our fair value is based on an FY21F PE of 27x.

• We have raised KLK’s FY21F net profit by 1.6% to account for a higher average CPO price of RM2,500/tonne compared with RM2,400/tonne originally.

• KLK’s FY20 core net profit of RM665.0mil (ex-gain on disposal of land of RM84.7mil and gain on deemed disposal of Equatorial Palm Oil of RM21.1mil) was 15.3% below our forecast and 19.0% short of consensus.

• In 4QFY20, KLK was affected by impairment losses at Synthomer PLC and losses at the KLK/Astra Agro palm refinery in Indonesia. KLK also recorded a higher effective tax rate of 28.8% in 4QFY20 vs. 17.1% in 3QFY20. In addition, EBIT of KLK’s plantation division (upstream and palm refining) dropped by 10.0% QoQ in 4QFY20 due to unrealised fair value losses on derivative contracts of RM27.2mil.

• KLK will declare its final gross DPS at a later date. We have forecast a gross DPS of 50 sen for FY20 and 55 sen for FY21F.

• KLK’s core net profit was relatively flat at RM665.0mil in FY20 vs. RM671.6mil in FY19. Although EBITDA rose by 17.5% to RM1.8bil in FY20, KLK was affected by an increase in the effective tax rate from 21.0% in FY19 to 27.7% in FY20. Depreciation expenses also rose by 9.3% to RM616.5mil in FY20.

• The increase in the effective tax rate in FY20 was due to the reversal of deferred tax assets in Indonesia. Previously, the calculation of deferred tax assets was based on a corporate tax rate of 25%. However, Indonesia has reduced its corporate tax rate to 22% and this resulted in a reversal of deferred tax assets.

• KLK’s average CPO price realised climbed by 21.8% to RM2,344/tonne in FY20 from RM1,924/tonne in FY19. Average palm kernel price increased to RM1,374/tonne in FY20 from RM1,210/tonne in FY19. On a negative note, KLK’s FFB production fell by 4.3% in FY20.

• KLK’s manufacturing (mainly oleochemicals) EBIT was up by 3.2% to RM448.6mil in FY20 due to improved profit margins in Malaysia and Europe and fair value gains of RM18.7mil on derivative contracts. Manufacturing EBIT margin was 5.5% in FY20 vs. 5.0% in FY19.

Source: AmInvest Research - 19 Nov 2020