- Maintain BUY on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM25.10/share. Our fair value is based on an FY16F PE of 25x.

- KLK’s FY16F PE valuation of 21.6x is cheaper than Felda Global’s 24.6x but close to IOI Corporation’s 21.1x and Sime Darby’s 20.0x.

- Among the big-cap plantation companies, we like KLK for to its young oil palm trees, efficient production costs and healthy balance sheet.

- Average age of the group’s oil palm trees is only 11 years old compared with FGV’s 15 years, IOI’s 12-13 years and Sime Darby’s 14.5 years (excluding New Britain Palm Oil Ltd).

- KLK’s balance sheet is clean. The group’s net gearing stood at 21.5% as at end-March 2015 compared with IOI’s 97.3%, FGV’s 31.1% (before acquisition of 37% of Eagle High Plantations) and Sime Darby’s 47.2%.

- We forecast KLK’s FFB production to rise by 4% in FY15F and 5.5% in FY16F. Most of the improvements in FFB production are expected to be driven by an increase in mature areas. Mature areas are envisaged to expand by 3% each in FY15F and FY16F compared with 4% or 8,549ha in FY14.

- We expect new plantings of oil palm to be slow in Liberia as KLK is currently carrying out HCS (high carbon stock) studies. In spite of this, we reckon that KLK is on track towards replanting about 1,000ha of oil palm trees in the country this year. We estimate replanting cost at more than RM10,000/ha.

- Manufacturing EBIT is expected to decline by 24% in FY15F before recovering by 15% in FY16F. We do not expect the crisis in Greece to affect KLK’s oleochemical operations in Europe significantly. More than half of the division’s profits are driven by the operations in Malaysia.

- Also, earnings contribution from the acquisition of Emery Oleochemicals’ operations in Germany is not anticipated to be significant. We believe that the unit is breaking even. We reckon that KLK would be integrating its fatty acids operations in Emmerich with Emery’s operations in Dusseldorf to reap synergistic benefits.

- As both plants are located close to each other, we think that KLK would be able to integrate the marketing and distribution networks of the companies. KLK proposed to acquire Emery’s oleochemical assets in Germany for Euro40.5mil or RM162mil in May 2015.

Source: AmeSecurities Research - 2 Jul 2015