- Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK), with an unchanged fair value of M24.85/share, based on an FY14F PE of 25x.

- In the past six years, KLK’s PE band ranged from a low of 8.4x to a high of 32.6x. Mean PE was 20.3x.

- We believe that KLK’s valuations are at a premium due to its growing plantation landbank. Also, the age profile of KLK’s oil palm trees is younger than most of the larger plantation companies.

- Average age of KLK’s oil palm trees in Indonesia is nine years old. Including Malaysia, the average of the group’s trees is 11 years old. About 19.4% of KLK’s oil palm trees in Indonesia are between four and nine years old while another 13% of the trees are less than four years old.

- KLK has plantable reserves of 18,000ha in Indonesia currently. Assuming a planting target of 5,000ha annually, KLK’s plantation landbank in Indonesia would be fully planted within four years’ time.

- As such, we reckon that Liberia would be KLK’s next area of growth. This assumes that Indonesia sticks to its proposed landbank ownership cap of 100,000ha for a group of companies.

- We believe that KLK would only start planting in Liberia in FY15F. This is because it would take time for the group to secure approvals from the relevant parties before it starts planting.

- KLK has to ensure that approvals are properly secured in Liberia due to the intense scrutiny from the environmental organisations.

- We believe that initial capital outlay would be high in Liberia due to the infrastructure costs. As such, we reckon that new planting cost could be as high as RM20,000/ha. Currently, only 3,750ha or 14.7% of the total landbank of 25,547ha is planted in Liberia.

- KLK’s foreign shareholding continued to decline. Foreign shareholding level stood at 12.9% as at end-December 2013 compared with 15.0% a year earlier. The foreign ownership level of 12.9% is the lowest since 2011. 

Source: AmeSecurities