Company Update

• After a dismissive year for the palm oil industry, KLR is braced for a recovery moving into FY20. Although both CPO and FFB productions are expected to be flattish, the rebound in CPO prices of late is expected to be sustainable as we approach the low-yielding period, coupled with rising demand ahead of the Ramadan festive season.

• As of 31st January 2019 (FY19), KLR continues to maintain a healthy tree age profile (see Appendix 1) that should sustain its earnings over the foreseeable future. The group currently has approximately 15,800 ha. of oil palm plantations in Sabah, Sarawak and Johor, of which close to 15,000 ha. are planted. Moving forward, the group will continue to roll out its replanting programme with approximately 1,000 ha. per annum to be replanted from 2019 to 2026.

• On the milling segment, KLR currently owns three mills at Kota Tinggi, Johor, Telupid and Keningau, Sabah with a combined processing capacity of 1.5 mln tonnes per annum. The group is also in the process of setting up three biogas power plant projects at its existing three mills for internal usage.

• Moving forward, KLR has earmarked approximately RM60.0 mln as CAPEX in FY20, (approximately RM40.0 mln for the development of biogas plants and RM20.0 mln as working capital for the plantation segment). As it is, the Kota Tinggi power plant is expected to be commissioned in June 2019 upon receiving approvals from relevant authorities.

With the 2,000 ha. of Native Customary Rights (NCR) land acquisition remaining deadlock, the replanting programme is aimed at maintain a healthy tree profile over the longer term (2019-2026). FFB production in FY20 is expected to remain flattish at approximately 310,000 tonnes as the production decline is attributable to the replanting programme in Sabah that will be supported by the increasing yields from the young mature plants from the estates in Sarawak and Sandakan.

In the meantime, its three biogas power plant are at the various stages of construction. The 1.8MW power plant at Kota Tinggi is expected to commence operations in June 2019, while the 2.0MW power plant in Keningau is expected to commence installation in 2H2019 and targeted for completion at end-2020. The Telupid power plant, which could potentially generate 1.2MW, is at the early stage of construction. Upon completion of all three plants, the division is expected to generate approximately RM17.5 mln per annum in revenue.

The European Commission draft regulation has concluded that palm oil cultivation caused excessive deforestation and usage of biofuels will be gradually reduced to zero by 2030. This does not bode well for Malaysia as demand is expected to be curtailed. According to Malaysian Palm Oil Board (MPOB), the European Union makes up to 12.0% or approximately 3.7 mln tonnes of the country’s total CPO exports in 2018. Nevertheless, the upcoming implementation of 30% blended biodiesel (B30) programme in Indonesia, slated in 2020, and the potentially higher demand from China for Malaysia’s CPO could help to ease the oversupply condition.

Valuation and Recommendation

We continue to like KLR as one of the most efficient crude palm oil planter with a superior yield per ha. vs. Malaysia’s average over the past few years. We believe that the recent recovery of CPO prices will be sustainable, ranging between RM2,150- RM2,250 per tonne as any gains arising from the improved demand from the upcoming Ramadan festival locally will be capped by the recent sluggish exports.

We tweaked our earnings forecast lower by 7.3% and 3.5% to RM77.7 mln and RM83.2 mln for FY20 and FY21 respectively on account of the still low CPO prices, coupled with the higher effective tax rate (from 25.0% to 29.0%). Despite that, we maintain our HOLD recommendation KLR, but with a lower target price of RM1.20 (from RM1.26) as we ascribed a target PER of 14.5x to its revised FY19 EPS of 8.3 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x. At the target price of RM1.20, KLR will trade an implied PER of 14.5x and 13.5x for FY18 and FY19 respectively, which is fair, in our view, given the cyclical nature of the CPO industry.

Risks to our recommendation include fluctuations in CPO prices. The volatility of CPO prices is subjected to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.

Source: Mplus Research - 24 Apr 2019