- Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM23.15/share. Our RNAV-based fair value implies a PE of 20.6x on CY14F plantation earnings.

- KLK’s PE band ranged from a low of 8x to a high of 33x in the past seven years. Mean PE was 20x.

- KLK’s annualised 1HFY13 core net profit was below our forecast and consensus estimates due to weaker-thanexpected plantation EBIT margin. We have revised KLK’s FY13F earnings forecast downwards by 8.6% to account for this.

- In spite of the earnings downgrade, we remain positive on KLK as it is a large-cap proxy to improving CPO prices. KLK’s fundamentals are expected to be underpinned by young oil palm trees, which should produce decent growth in FFB production in the future.

- Plantation EBIT declined 32.9% from RM687.3mil in 1HFY12 to RM461.4mil in 1HFY13 due to lower CPO price. EBIT margin of the plantation division shrank from 25.2% in 1HFY12 to 21% in 1HFY13.

- Although FFB production expanded 20.4% YoY to 1.9mil tonnes in 1HFY13, this was not enough to offset the impact of weaker selling prices.

- Average CPO price realised was RM2,271/tonne in 1HFY13 versus RM2,777/tonne recorded in 1HFY12.

- Like IOI Corporation, KLK’s manufacturing profits rebounded by more than two-fold YoY in 1HFY13. Manufacturing EBIT surged from RM53.7mil in 1HFY12 to RM150.3mil in 1HFY13 on the back of positive demand for fatty acids and fatty alcohol.

- Enhancements in EBIT margin were also supported by lower cost of raw materials. EBIT margin of the manufacturing division improved from 2.1% in 1HFY12 to 6.6% in 1HFY13.

- Property earnings climbed 107% YoY to RM34.3mil in 1HFY13 on the back of a 62.8% expansion in turnover. The division’s profitability was driven by the Bandar Sri Coalfields property development project in Sungai Buloh.

Source: AmeSecurities