Investment Highlights

• We maintain SELL on Kuala Lumpur Kepong (KLK) with a lower fair value of RM21.55/share vs. RM23.70/share previously. We have reduced our FY23F PE assumption for KLK to 18x from 22x. The PE of 18x was KLK’s average PE in the past two years. Previously, we used a PE of 22x as this was closer to the top-end PE of 27x for KLK in a CPO price upcycle. We ascribe a 3-star ESG rating to KLK.

• KLK has completed integrating its operations with IJM Plantations (IJMP). IJMP’s new name is Sawit Nusantara. Sawit Nusantara’s estate operations in Malaysia and Indonesia are now reporting to KLK’s respective regional heads of operation.

• Also, the RSPO certification process of Sawit Nusantara is expected to be completed by the end of 2024. KLK hopes to complete the certification process early as there is good demand for RSPO-certified palm products. The price premium for RSPO-certified products is about US$30/tonne or RM132/tonne currently.

• KLK hopes to receive about 3,000 foreign workers from Indonesia, India and Nepal by the end of September 2022. Its first batch of workers is arriving at end-July. Currently, KLK is facing a labour shortage of 20% or 3,000 workers.

• We forecast KLK’s FFB production growth to be 27.5% in FY22E (8MFY22: 25.2%) and 3.5% in FY23F. The strong 27.5% increase in FFB production in FY22E is underpinned by the acquisition of Sawit Nusantara. We believe that Sawit Nusantara accounts for a third of KLK’s FFB production. So far, the weather is favourable at KLK’s oil palm estates in Malaysia. Although there is heavy rainfall in Indonesia, we believe that there are no issues with fruit evacuation yet.

• We estimate KLK’s ex-mill cost of CPO production to be RM2,100/tonne in FY22E (FY21: RM1,509/tonne). The rise in the cost of production per tonne in FY22E is due to higher costs of wages and fertiliser. Fertiliser costs are anticipated to surge by 30% in FY22E.

• We believe that the new palm refinery and oleochemical plant in East Kalimantan would contribute positively to KLK’s earnings in the long term. We do not expect the palm refinery to be profitable in the first year of operations as it takes time to ramp up the utilisation rate.

• KLK’s jetty and palm refinery in East Kalimantan are expected to be completed by the end of 2022E. The oleochemical plant would be completed a year later. The integrated complex is estimated to cost RM700mil in total. The palm refinery would increase KLK’s refining capacity by 660,000 tonnes to 2mil tonnes per year.

Source: AmInvest Research - 5 Jul 2022