- Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM23.90/share, which implies an FY15F PE of 27x. We have reduced KLK’s FY15F EPS by 4.4% to account for weaker oleochemical earnings.

- KLK’s foreign shareholding has been declining. Foreign shareholding was 12.77% as at end-October 2014 compared with 13.57% as at end-July 2014 and the three year high of 19.17% as at end-April 2012. The lowest level in the past three years was 12.75%, which was recorded as at end-February 2014.

- We expect KLK’s net profit to edge down 5.4% to RM937.8mil in FY15F due to a fall in manufacturing earnings. We have forecast KLK’s manufacturing EBIT to decline by 26% in FY15F due to erosions in selling prices and operating margin.

- Additionally, there is risk that the oleochemical unit may record further inventory write-downs due to the plunge in crude oil prices. KLK’s write-downs of inventory amounted to RM16.3mil in 4QFY14 and RM28.2mil in FY14.

- Although negative refining margins are likely to continue in FY15F, we reckon that there are a few mitigating factors. KLK’s collaboration with PT Astra Agro Lestari would help in the sourcing of CPO for its refineries in Indonesia.

- We estimate KLK’s CPO production in Indonesia at 400,000 tonnes to 500,000 tonnes versus the group’s refining capacity of 1.26mil tonnes.

- Apart from selling price pressures, the increase in refining capacity in Indonesia has resulted in stiff competition for feedstock.

- Also, KLK’s share of losses in the Dumai refinery could decline in FY15F as 50% of the refinery is now owned by PT Astra Agro. In November 2014, KLK and PT Astra Agro set up a 50/50 joint venture in respect of the Dumai refinery.

- KLK’s FFB production is forecast to rise by 5% in FY15F compared with 3.5% in FY14. Underpinning the output improvement is an enhancement in yields. KLK does not have significant exposure to the floods in the east of Peninsular Malaysia.

- We expect minimal new plantings in FY15F as KLK does not have sizeable plantable land left in Indonesia. We estimate KLK’s plantable reserves at 11,000ha to 12,000ha in Indonesia. New plantings were roughly 3,000ha in FY14.

Source: AmeSecurities