• We believe KLK is on track to achieve its Group’s oil yield target of 6 MT/ha of CPO within the next 2 to 3 years, as it increases effort to raise production and productivity. KLK’s oil yield is already the highest amongst its peers at 4.8 MT/ha.

• About 58% of its planted area (213,411ha) is in the lucrative age that is set to benefit from the improvement in palm oil products price. Hence, KLK should see its plantation segment fetching better margins in FY21/22.

• KLK now looks attractive, which currently trades at 24.4x our projected earnings for FY21, well below its historical 5-yrs average forward PE of 32.0x. Upgrade to BUY with higher TP of RM24.40 from RM23.10 previously, based on P/B of 2.3x and target BV/share of RM10.61.

A sturdy business model and committed to sustainability

KLK is one of the best plantation proxies that offers index-linked and Shariah status which is also a component of the FTSE4Good Index. Fundamentally, we believe KLK has strong financials to diversify its earnings and contribute to long-term growth, if the need arises. The Group’s upstream business is highly exposed to the current strength of CPO price, while the manufacturing business act as a buffer against downside risk from the upstream segment. Adding to this is the rubber business – a potential earnings catalyst which we believe is yet to be priced in. KLK’s foreign shareholding as at end March 2021 stood at 12.84% versus 12.48% in Dec-2020. KLK is one of the leaders in oil palm sustainability with 100% of its group palm oil mills being RSPO certified.

Operational efficiencies to drive performance

Under the Group’s focus on growth and operational excellence to drive performance, KLK aims to achieve FFB yield of 20 MT/ha at first year of harvest and 20% increase in labour productivity through mechanisation for overall 6 MT/ha within the next 2-3 years.

Earnings outlook is promising

We foresee that KLK is set to record stronger earnings, estimated to grow at 3-yrs CAGR of 15% on the back of 11% increase in revenue; supported by higher production, ASP of palm products and costs efficiencies. We forecast a PATAMI of RM962m and RM922m for FY21/22F assuming an average CPO price realised of RM2,788/MT and RM2,550/MT for the same period. We are convinced that its long term prospect remains promising with positive factors driving key segmental growth on all fronts.

BUY at a higher TP of RM24.40

Upgrade our recommendation to BUY (from HOLD) on the stock with higher Target Price of RM24.40 from RM23.10 previously, based on historical avg. 3-yrs P/B of 2.3x and target BV/share of RM10.61.

Source: BIMB Securities Research - 27 Apr 2021