Investment Highlights

• We maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM25.00/share. Our fair value for KLK is based on an FY22F PE of 25.0x. KLK’s foreign shareholding stood at 12.7% as at end-February 2021 vs. 14.2% as at end-February 2020. We ascribe a 3-star ESG rating to KLK.

• In our stock universe, KLK is the most active in acquisitions. We expect this to continue in the coming years as KLK seeks to expand its downstream processing capacity and plantation landbank. KLK is flushed with cash as reflected in its gross reserves of RM3.9bil as at end-September 2020.

• In 2020, KLK proposed three acquisitions amounting to RM1.0bil in total. Two of the acquisitions involved plantation land in Indonesia while the other involved purchasing an additional 20% stake in a property company in Johor.

• We believe that KLK would not be disposing of its 21.0% stake in Synthomer PLC any time soon as it is a value-adding investment. At a share price of £4.68, KLK’s stake in Synthomer is worth about £418.0mil or RM2.4bil. Share of profits in associates (mainly Synthomer and 22.2%-owned MP Evans) are forecast to account for 12.4% of KLK’s pre-tax profit in FY22F.

• We forecast KLK’s FFB production growth to be 3.5% in FY21F (5MFY21: -1.5% YoY). KLK’s FFB production is expected to start rising from March 2021 onwards before reaching its peak in October or November. Indonesia is envisaged to account for 55% to 60% of group FFB production in FY21F.

• KLK is estimated to replant about 10,000ha to 12,000ha of oil palm trees in FY21F vs. 12,500ha in FY20. Most of the replanting will be carried out in Belitung, Indonesia and certain parts of Sabah. We estimate the cost of replanting until maturity is expected to be around RM15,000/ha to RM20,000/ha.

• We believe that KLK may not be able to sustain the impressive 1QFY21 earnings of its oleochemical unit, in the rest of the year. This is because it takes time to increase the selling prices of oleochemical products after the cost of raw materials has surged.

• Hence, we forecast KLK’s oleochemical EBIT to inch down by 1.5% to RM442.5mil in FY21F. We have assumed a marginal squeeze in oleochemical EBIT margin from 5.5% in FY20 to 5.3% in FY21F. We believe that most of KLK’s oleochemical products are used in household items such as soaps, detergents and shampoos. We reckon that it is not easy to raise selling prices in this product segment as competition is stiff and end-buyers are price-sensitive.

Source: AmInvest Research - 6 Apr 2021