- We affirm BUY on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM23.15/share.

- We continue to like KLK for the strong growth in its FFB production, which is underpinned by its young oil palm trees in Indonesia. Average age of KLK’s trees in Indonesia is roughly 8.9 years old.

- Against IOI Corporation, Felda Global Ventures and Sime Darby, KLK’s FFB production increase was the highest at 20.4% YoY in the recent financial results season.

- Indonesia’s proposed cap on landbank ownership of 100,000ha is unlikely to affect KLK in the short-term as KLK has exceeded the proposed cap of 100,000ha; the group still has another 44,342ha of landbank in Papua New Guinea (PNG).

- Presently, KLK is carrying out background works on its landbank in PNG. We reckon that the group would start planting in PNG in two years’ time. KLK still has more than 20,000ha of plantable land in Indonesia, which should keep it busy for another two to three years.

- KLK’s FFB production is expected to grow 15% to 20% in FY13F. We think that the group’s FFB yield would improve from 21.3 tonnes/ha in FY12 to a range of 22-23 tonnes/ha in FY13F.

- Manufacturing EBIT is forecasted to expand 54% to RM289mil in FY13F on the back of margin enhancements from a lower cost of feedstock. Prices of raw materials such as palm kernel oil and palm stearin have declined close to 20% since the middle of last year.

- KLK is currently carrying out testing works on its new refinery in Belitung, Indonesia. Earnings contribution from the new refinery is not expected to materalise in FY13F.

- The other two refineries are targeted to be completed by end-2013F. In total, KLK would have refining capacity of 3,600 tonnes/day or 1.3mil tonnes/year in Indonesia.

- Assuming an EBIT margin of US$20/tonne and average utilisation rate of 60%, we estimate that the new refineries would increase KLK’s FY14F manufacturing EBIT by 15%. We have not accounted for these in KLK’s earnings forecast yet.

Source: AmeSecurities