• KLK’s recent-completed expansion in upstream operations is expected to contribute positively to the Group’s earnings as well as shareholders’ value in the future.

• Driven by firm CPO price and significant improvement in FFB and CPO production, we revised our earnings estimates higher and forecast FY22/23 PATAMI to RM1,485m (+23%) and RM1,385m (+15%).

• Reaffirm BUY with new TP of RM25.30 against RM24.40 previously based on hist. avg. 3-yrs P/B of 2.3x and BV/share of RM11.00, which in our view, is more reflective of its potential, and fully justified given earnings will remain strong in this financial year. KLK now looks attractive, which currently trades at 16.9x our projected earnings for FY22, well below its historical 5-yrs average forward PE of 25.6x.

Sizeable upstream expansion

Following the latest completed acquisition of IJM Plants and PT Pinang Witmas Sejati, KLK’s group total landbank in Malaysia and Indonesia has increased by 73,827 ha to approx. 348k ha in FY22, out of which 81% has been planted with oil palm. With that we foresee the growth momentum will continue, stemming from the younger age profile (IJMP age profile: 11.8 yrs.) that will provide visible revenue and earnings growth catalyst. We estimate that KLK’s FFB production to surge by 22% to 4.8m tonnes in FY22 from 3.8m tonnes in FY21. Nonetheless, expected group FFB yield to soften to 20.24 t/ha from 21.43 t/ha in FY21, in view of, younger oil palm trees in Indonesia of circa 11.4 yrs. (Group age profile: 12.3 yrs.; Malaysia: 13.4 yrs.).

Earnings outlook is promising

We foresee that KLK is set to maintain its record earnings, estimated to grow at 3-yrs CAGR of 14.3% on the back of 10.7% increase in revenue; supported by higher production, ASP of palm products and costs efficiencies. We revised our earnings estimates and forecast a PATAMI of RM1,485m (+23%) and RM1,385m (+15%) for FY22/23F assuming an average CPO price realised of RM3,725/MT and RM2,975/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. 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.

BUY at a higher TP of RM25.30

Reiterate our BUY call on the stock with higher TP of RM25.30 from RM24.40 previsously, based on historical average 3-yrs P/B of 2.3x and BV/share of RM11.00. Our high-conviction recommendation is based on its earnings potential, despite negativity surrounding the industries on ESG issues plus encouraging revenue and earnings drivers as we see two immediate-term earnings catalyst namely, 1) higher palm products price and, 2) significant improvement in FFB production. Other argument for this is its attractive valuation where KLK currently trades at 16.9x its 12-months forward PE, well below its 5-years average forward PER multiples of 25.6x.

Source: BIMB Securities Research - 11 Feb 2022