Investment Highlights

• We maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM24.80/share. Our fair value for KLK is based on a FY21F PE of 27x.
   
• We forecast a gross DPS of 55 sen in FY21F (FY20E: 50 sen), which implies a payout of 60% (FY20E: 70%).
   
• We forecast KLK’s manufacturing EBIT to fall by 7.0% to RM417.4mil in FY21F due to an erosion in operating profit margin.
   
• We have assumed a manufacturing (oleochemicals, gloves and parquet) EBIT margin of 5.0% in FY21F compared with 5.5% in FY20. We think that high costs of raw materials would exert pressure on manufacturing EBIT margin in FY21F.
   
• We forecast KLK’s plantation earnings to rise by 35.0% in FY21F supported by a higher CPO price and increased palm kernel crushing profits. We have assumed an average CPO price of RM2,500/tonne for KLK in FY21F vs. RM2,344/tonne recorded in FY20.
   
• We believe that KLK’s FFB production would grow by 3.5% in FY21F (FY20: -4.3%) on the back of higher FFB yields and a 2% increase in mature areas. We have assumed an average FFB yield of 22.5 tonnes/ha in FY21F vs. 22.0 tonnes/ha in FY20.
   
• KLK is expected to replant aggressively in FY21F. We think that KLK would replant about 11,000ha to 14,000ha of ageing oil palm trees in FY21F compared with about less than 10,000ha in FY20.
   
• We believe that KLK would continue acquiring assets in FY21F. The group has carried out an acquisition every year since 2010 with the exceptions of 2011 and 2019.
   
• In 2020, KLK proposed to acquire 24,922ha of planted land in Indonesia from the Perak State Agricultural Development Corporation and TSH Resources (via two separate transactions) for RM859.2mil in total. KLK also proposed to purchase a 20% stake in Fraser Development for RM182.6mil from UEM Sunrise last year.

Source: AmInvest Research - 26 Jan 2021