Highlights

The dry weather condition since end-2013 has resulted in a 4.8% yoy decline in its 1HFY09/14 overall FFB output. Given the lower FFB output achieved in 1H, management is now guiding for a flattish FFB output growth in FY09/14 (vs. 7-8% growth it previously guided and 10.7% it has achieved last year). Despite the lower FFB output growth guidance, management still expects CPO production cost to remain at about the same level as last year, as higher labour and transportation costs will be offset by lower fertilizer cost

Based on our estimates, a lower-than-expected FFB output would only have a minor impact in our earnings forecast. Assuming there is no growth in FY09/14 FFB output (vs. 2.8% we are projecting), it would only hit our FY09/14 by 2%.

Although the property development earnings will slow from FY09/13, we believe there are still plenty of opportunities for KLK to unlock the value of part of its land bank over the longer term. This is mainly because KLK has a decent size of property development land bank at low land cost and the joint venture with UEM Sunrise allows KLK to leverage on UEM Sunrise’s expertise in property township development.

Management indicated that it would incur a total capex of RM900m in FY09/14, mainly to: (1) Continue with its plantation development works in Indonesia; and (2) Expand its downstream facilities (in particularly, refinery and fatty acid plants) in Indonesia.

Earnings Forecasts

Maintained, pending release of 2QFY09/14 financial results on 22 May 2014.

Catalysts

• Higher-than-expected FFB output growth;
• CPO prices strengthen further; and
• Recovery in property demand sentiment.

Risks

• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD

Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Low property land bank cost.

Negatives – (1) Illiquid trading volume; and (2) Valuation.

Valuation

We are taking this opportunity to rationalize our valuation method for KLK’s property development division (from P/E to RNAV), which we believe is more reflective of the property business. Post valuation methodology rationalization, our SOP-derived TP on the stock is raised by 8.5% from RM21.31 to RM23.12. Upgraded from Sell to HOLD.

Source: Hong Leong Investment Bank Research - 5 May 2014