Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a fair value of RM22.22/share. Our fair value for KLK is based on an FY22F PE of 22.0x. We ascribe a three-star ESG rating to KLK.

• We estimate that IJM Plantations (IJMP) would improve KLK’s FY22F net profit by 3% to 4% based on a shareholding of 56.6%. Going forward, we believe that KLK would restructure some of IJMP’s RM697.3mil gross borrowings as they are not syariah compliant currently.

• Also, we reckon that KLK would certify IJMP’s operations with the RSPO by FY24F. Recall that KLK completed its acquisition of shares in IJMP from IJM Corporation for RM1.5bil in early September 2021. We have not accounted for the acquisition of IJMP in KLK’s P&L yet.

• KLK’s net gearing is expected to remain comfortable after the acquisition of IJMP. The group’s net gearing would increase to an estimated 33% from 23.5% as at end-FY20 based on a 56.6% shareholding. If KLK receives 100% acceptances for the MGO of IJMP, KLK’s net gearing would rise to 44.7%. The offer document is being despatched to IJMP’s shareholders currently. The closing date for the MGO is 11 October 2021.

• We believe that KLK’s FFB production would be flat in FY21E. In Peninsular Malaysia, KLK is facing a labour shortage of 10% while in Sabah, FFB yields are still soft.

• KLK’s ex-mill cost of CPO production is estimated to be RM1,500/tonne in FY21E vs. RM1,465/tonne in FY20. Looking ahead to FY22F however, we believe that KLK’s cost of CPO production per tonne would rise by more than 10% as fertiliser costs have surged by more than 30%.

• We reckon that KLK’s manufacturing division (mainly oleochemicals and gloves) would be able to sustain its EBIT margin of more than 6% going forward as improved sales volume of oleochemical products helps reduce the unit cost of production.

• Also, we reckon that KLK’s oleochemical plant in Indonesia is benefiting from a lower cost of feedstock currently. Recall that CPO in Indonesia is cheaper than in Malaysia due to the CPO export tax and levy. We forecast KLK’s manufacturing EBIT margin to be 7.5% in FY21E vs. 5.5% in FY20.

Source: AmInvest Research - 21 Sept 2021