Investment Highlights

• Maintain HOLD on Kuala Lumpur Kepong (KLK) with a lower fair value of RM25.50/share (vs. RM25.70/share previously). Our fair value implies an FY19F PE of 25x.

• We have reduced KLK’s earnings forecasts by 2.5% for FY18F and 5.0% for FY19F. This is due to a lower CPO price assumption of RM2,450/tonne vs. RM2,650/tonne originally for FY18F. We have also revised our FY19F CPO price assumption from RM2,750/tonne to RM2,500/tonne.

• We visited Advance Agriecological Research’s (AAR) lab in Sungai Buloh last week. AAR is jointly owned by KLK and Boustead Holdings. We also visited KLK’s Tuan Mee oil palm estate and Bandar Seri Coalfields property development project in Sungai Buloh.

• The site visits affirm KLK’s fundamentals. The group is well-managed with long-term growth potential. However due to languishing CPO prices currently, there is no catalyst for a re-rating of valuations.

• We believe that AAR is one of the leading research unitsof oil palm in the country. AAR has the capacity to produce one million high-yielding ramets (green shoots of oil palm). However due to labour shortage, AAR is only producing about 600,000 to 700,000 ramets per year currently.

• The ramets have the potential of producing oil yields of 4.5 to 8.4 tonnes per ha vs. hybrid seedlings’ oil yields of 3.8 to 7.1 tonnes/ha. Currently, AAR is producing the ramets for KLK and Boustead only. Some of the ramets are used by KLK in its replanting efforts.

• At Ladang Tuan Mee, the weather was bright in the morning but wet in the late afternoon. We witnessed the harvesting of fresh fruit bunches (FFB) using Cantas, which is a motorised sickle. We find that Cantas is faster and requires less effort than the normal sickle. Cantas’ shortcoming is that it can only be used on oil palm trees, which are less than six metres in height. Hence, it cannot be used on the older and taller oil palm trees.

• Bandar Seri Coalfields’ long-term upside lies in its potential linkage to the Guthrie Corridor Expressway and development of an LRT4 station. Based on channel checks, the pricing of properties at Bandar Seri Coalfields is slightly cheaper than Eco Grandeur, which is nearby. Currently, only 500 out of the 1,000 acres in the area have been developed. Upcoming features include Wesley Methodist School, which will open in year 2019F and a clubhouse, which will be completed at end-2018F.

Source: AmInvest Research - 24 Apr 2018