• Business profile: KFIMA’s main bus iness es are derived from 4 major segments. (1) Manufacturing or production and trading of security documents mainly for the government. Operations in this segment are handled via its 61% owned FIMACORP’s privatized s ubs idiary Percetakan Keselamatan Nas ional S/B, Malays ia’s larges t security printe r and also the main printer of government security documents. It is also involved in production and sale of bank notes through its 20%-owned German-based Giesecke & Devrient (M) S/B. In the last 5 years, this division contributed about 40-50% to PBT. (2) Plantation division (contributed ~20-30% to PBT). KFIMA currently owns over 27,000 ha of oil palm land in Malaysia & Indonesia and over 12500 ha were planted. Almost 50% of the planted palms are prime trees ageing between 10- 18 years while the rest are old trees >19 years (3%), immature trees<4 yeas (37%) and young trees 4-9 years (9%). (3) Bulking division (contributed about 25-30% to PBT). Its core business activities are bulk handling and storage of various types of liquid and semi -liquid products as well as transportation and forwarding services at Port Klang and Penang. (4) Food division & others (mixed performance over the years ). The Food Division is mainly involved in the canning of fish products and food packaging such as food manufacturing of mackerel and tuna in Papua New Guinea.

• Resilient amidst challenging market. KFIMA’s s us tainability is backed by its steady earnings from manufacturing, plantation and bulking businesses. To recap, core earnings had been growing at 16% CAGR from FY03 to FY15 and consensus are expecting FY16-18 earnings to improve by another 12% CAGR to RM68m.

• Growing contribution from plantation segment. In the next 2-3 years, contribution from plantation division is set to escalate as its immature estates will enter into production age and boost FFB output growth. On the other hand, near-term cost pressures should als o ease pos t FY3/17 as the group’s new planting program (started since 2010/2011) is nearing tail-end, reinforced by soaring CPO prices.

• Netcash/share of RM0.87 is equivalent of 46% share price and has solid capacity to declare higher dividend. Despite challenging operating environment and heavy capex and biological assets expenditures in the last 5 years (amounted to ~RM300m), KFIMA’s financial pos ition remained s ol id. With the strong operating netcash flow and in anticipation of stronger FY17/18 earnings, KFIMA is in excellent position to declare higher dividends moving forward.

• Likely to retest LT objective at RM2.10-2.30 zones following a bullish downtrend line breakout. KFIMA has been inching up since hitting 52-week low of RM1.71 (26 Jan). Following its recent 200-d SMA/ overhead resistance breakout (daily chart) and long term downtrend line breakout (weekly chart), we expect share prices to trend higher towards RM2.00 psychological barrier and RM2.10 (200-w SMA) levels, if supported by improving volume.

• A decisive breach above RM2.10 levels with heavy volume will spur prices higher towards our long term objective of RM2.30. Key supports are RM1.77- 1.81. Cut loss at RM1.73.

• Attractive risk to reward ratio with 22.3% upside against 8% downside. All in, we see a good risk to reward ratio for investor with a theoretical entry price of RM1.88 given that the downside to the cut loss zone of RM1.73 is 15 sen (-8%) while the upside to the LT target of RM2.30 is 42sen (+22.3%).

Source: Hong Leong Investment Bank Research - 15 Apr 2016