-  Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM24.85/share, which is based on a FY15F PE of almost 22x.

-  In the past seven years, KLK’s PE ranged from a low of 8.4x to a high of 32.6x. Average PE was 20.3x. Compared to the FY14F PEs of large-cap plantation companies in Malaysia of 17.6x to 21.1x, KLK’s PE is marginally higher.

-  We believe that KLK’s valuation is at a premium due to the young age of the group’s oil palm trees. Average age of KLK’s oil palm trees is 11 years old as young trees in Indonesia compensate for the older trees in Sabah.

-  FFB production is forecasted to be flat in FY14F. Although KLK’s FFB output fell by 4.8% YoY in 1HFY14 due to the dry weather, this is expected to be cushioned by higher production in 2HFY14.

-  In spite of the potential lagged impact of the dry weather, which took place early this year, we understand that there is a possibility that FFB production would still be robust.

-  We believe that KLK might only start planting in Liberia in FY15F. KLK is still in the process of carrying out the HCV (high conservation value) survey and getting consent from the natives in Liberia.

-  We reckon that cost of new planting in Liberia would be higher than the RM18,000/ha to RM20,000/ha incurred in Malaysia and Indonesia as certain equipments are not available in the country. In addition, things are priced in US$ in Liberia.

-  Apart from this, we think that it would take time for KLK to train workers in estate management and harvesting practices in Liberia. We understand that KLK’s management is in contact with the team in Liberia almost every day.

-  Property earnings are not expected to be exciting in FY14F due to a lower number of property launches. In the immediate term, the Bandar Sri Coalfields residential project is envisaged to account for the bulk of KLK’s property earnings.

-  In the longer-term, the Gerbang Land township project in Johor is anticipated to be the next kicker of growth. The project is expected to be launched in two years’ time. KLK has renamed its property subsidiary as KLK Land Sdn Bhd from KL-Kepong Property Holdings Sdn Bhd. 

Source: AmeSecurities