• KLK remains as one of the more resilient big-cap stocks in the plantation sector space in the face of a likely slow-down in CPO price in 2H22. The company’s fundamentals are intact with sustainable margins in manufacturing business. This, along with solid cash position is expected to cushion the downside risk in plantation earnings.

• About 62% of its planted area (275,037ha) is in the lucrative age profile that is set to benefit from higher palm products price and therefore, better margins in FY22/23.

• Reaffirm our BUY call with a new TP of RM28.77 based on hist. avg. 3-yrs P/B of 2.1x and BV/share of RM13.70, which in our view, is more reflective of its potential, and fully justified given earnings will remain convincing in this financial year.

• KLK valuation looks attractive, trading at 12.8x our projected earnings for FY23, well below historical 5-yrs average forward PE of 21.9x.

2Q22 in Retrospect

KLK’s reported a higher core PATAMI of RM525.5m in 2Q22 (1H22: RM1.03b, +82% YoY) versus RM291.9m in 2Q21 and RM505.3m in 1Q22 thanks to higher average selling price (ASP) realised of CPO and PK, as well as stronger-than-expected downstream margins and share of profit from associate. Although FFB production increased by 23% YoY and 27% in 1H22 to 2.38m tonnes, FFB production dropped by 12% QoQ to 1.11m tonnes due to seasonal factors which is in line with industry trend.

Earnings Outlook Remains Promising

KLK is set to maintain record earnings, estimated to grow at a 3-year CAGR of 37.8% on the back of a 15.4% increase in revenue; supported by higher production, ASP of palm products and costs efficiencies amid a flip-flop in Indonesia export structure, policy as well as export tax and levies. Its long-term prospect remains promising with positive factors driving key segmental growth on all fronts. Given the Group’s upstream business is highly exposed to the current strength of CPO price, its manufacturing arm, which makes up of c. 30%-40% of group PBT, looks to be in better shape to help cushion any large falls in plantation earnings due to an expected reversal in CPO prices, if any. Although we are heading towards moderation in CPO prices in 2H22, we believe the pullback could be less severe than in previous cycles, driven by structural changes in the plantation sector. Adding to this is the rubber business – a potential earnings catalyst which we believe has yet to be priced in by investors.

Sizeable Upstream Expansion

Following the latest acquisition of IJM Plants, KLK’s group total landbank in Malaysia and Indonesia has increased by 73,827 ha to approx. 348k ha (+21.2%) in FY22, out of which 80% have been planted with oil palm. We estimate that KLK’s FFB production to surge by 28% to 5.05m tonnes in FY22 from 3.95m tonnes in FY21. Nonetheless, we expect the group FFB yield to soften to 21.23 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.) as well as prolonged labour shortage in Malaysia and aggressive replanting activities.

Reasserting BUY Call at a New TP of RM28.77

Reaffirmed a BUY call on KLK with a new Target Price of RM28.77 versus RM28.40 previously, based on P/B of 2.1x (historical low 3-yrs avg.) and BV/share of RM13.70 as we roll our valuation to FY23. Our TP offers 19.9% upside potential from the current market price.

Source: BIMB Securities Research - 1 Jul 2022