Highlights from our recent virtual meeting with KLK include (i) FFB output growth of 3-5% in FY21, as it expects output to catch up for the remaining months of FY21, (ii) plans to have IJMP achieved RSPO certification within 3 years (upon completion of acquisition), (iii) challenging operating environment for manufacturing segment (particularly operations in Malaysia), due to duty advantage in Indonesia (which will likely to stay for a while), (iv) contribution from property segment will remain stable, supported by launches of premium landed units in Bandar Seri Coalfields in the near term, and (v) first medical glove production line will be commissioned by end-FY21, with the remaining 14 production lines (with a total capex of RM200m) to be completed in stages over the next 2-3 years. Maintain earnings forecasts and BUY rating, with sum-of-parts TP tweaked slightly lower to RM26.42.

FFB output growth guidance of 3-5% in FY21. Management toned down its FFB output growth guidance for FY21 to 3-5% (from 10% previously), due to flattish FFB output growth registered YTD (which fell 0.1% to 2.52m mt in 8MFY21). Management expects FFB output to catch up in coming months (when peak cropping cycle kicks in).

Acquisition of IJMP. Management shared that it has plans for IJMP’s estates to achieve RSPO certification within 3 years (upon completion of acquisition). While it is premature to estimate the cost associated with RSPO certification, we understand that KLK may incur compensation cost (which is the major cost component in achieving RSPO certification) of ~US$2.5k/ha, if past experience is a guide. Recall, KLK had on 11 Jun 2021 entered into sale and purchase agreement to acquire a 56.2% stake in IJMP for RM1.53bn (or RM3.10 per IJMP share). Upon completion, KLK will extend an MGO to acquire the remaining 43.8% stake in IJMP for the same offer price. Upon completion (expected by 4Q21), the acquisition will expand KLK’s oil palm plantation landbank by 28.6% to 274,377 ha.

Manufacturing segment. Management sees challenging operating environment for manufacturing segment (particularly operations in Malaysia), due to duty advantage in Indonesia (which will likely to stay for a while, as management believes there is no urgency for Indonesian government to review its palm oil export duty structure, given recent weakness in CPO price). Nevertheless, this will be partly mitigated by continued operational improvement in its two oleochemical plants in Germany (which have started turning around since 2QFY21).

Property contribution to remain stable. Despite challenging property market, contribution from property segment will remain stable, supported by launches of premium landed units in Bandar Seri Coalfields in the near term. Kick off of new township (i.e. Caledonia township in Ijok), on the other hand, will likely be delayed to FY22 in view of the Covid-19 pandemic.

Medical glove foray. We understand that the first medical glove production line will be commissioned by end-FY21, with the remaining 14 production lines (with a total capex of RM200m) to be completed in stages over the next 2-3 years. While KLK is not new to the glove manufacturing business (it already has presence in industrial glove production business since more than 30 years ago), we are at best neutral on this venture, given the rapid capacity expansion globally.

Forecast. Maintained, based on unchanged CPO price assumptions of RM2,995/mt for FY21 and RM2,663/mt for FY22-23. We have yet to impute KLK’s medical glove foray into our earnings forecasts, as contribution will likely be minimal (relative to its existing earnings base).

Maintain BUY; TP: RM26.42. We maintain our BUY rating on KLK, with a slightly lower sum-of-parts TP of RM26.42 (from RM26.60 earlier), as we updated our valuation parameters.

Source: Hong Leong Investment Bank Research - 21 Jun 2021