Out of 30 analysts covering KLK, we are among those three on the contrarian side who have OUTPERFORM/BUY recommendation. While this could be caused by market perception that KLK is trading at premium valuation against its peers, we wish to highlight that the premium valuation is justified. Note that KLK has the youngest palm tree age profile of around 11 years old (against its peers’ range from 13 to 17 years old). This should provide better FFB growth prospects for the next three years. As a result, we believe that the premium valuation can be maintained due to the structural advantage which is supportive to its share price. Additionally, we see KLK implementing good growth strategy in FY13 for both plantation and manufacturing (MFG) division and this is expected to continue in the future. We maintain our FY14E and FY15E core earnings of RM1.30b and RM1.36b, respectively. Reiterate OUTPERFORM on KLK with Target Price of RM26.10 based on unchanged 21.2x Fwd. PER valuation.

Taking a contrarian view on KLK. Out of 30 analysts covering KLK, we are among those three on the contrarian side who have OUTPERFORM/BUY recommendation. While this could be caused by market perception that KLK is trading at premium valuation against its peers, we wish to highlight that the premium valuation is justified. Note that KLK has the youngest palm tree age profile of around 11 years old (against its peers’ range from 13 to 17 years old). This should provide better FFB growth prospects for the next three years. As a result, we believe that the premium valuation can be maintained due to the structural advantage which is supportive to its share price.

Good timing for entry now. We think that investors should start accumulating KLK shares as it is the key laggard among big cap planters, YTD. Despite having a more favourable age profile for its plantations, its YTD return so far is the lowest at negative 3.9% and we see this as an attractive opportunity for long-term investors to accumulate KLK shares (See Page 2). More importantly, CPO price has appreciated by RM153/mt or 5.8% to RM2812/MT YTD and we believe that the uptrend in CPO prices will eventually result in higher share prices for KLK as its earnings is significantly influenced by CPO prices.

Upstream plantation growth strategy intact. Its latest Annual Report showed that KLK has increased its planted area by 3,808 ha or 2% to 196,232 ha in FY13. Out of this, 35,904 ha or 18% is still immature. In FY14, we believe that KLK should achieve new planting of 5,000 ha, mainly focused in Indonesia. Overall, we like the Group’s discipline in sustaining its planted area growth as this bodes well for its long-term FFB growth.

MFG division doing well too. Note that MFG division EBIT has grown 75% YoY to RM329m in FY13 due to strong earnings growth seen in its oleochemical sub-division. The strong performance has continued into FY14 so far with MFG 1Q14 EBIT increasing by 23% YoY to RM82m as sales volume for (oleochemical sub-division) to the European market improved. For the longer term, we gather that KLK is planning to expand its annual capacity by 265,000 mt in FY14 (165,000 mt in Indonesia and another 100,000 mt in Germany).

Maintain OUTPERFORM with unchanged Target Price of RM26.10. We maintain our FY14E and FY15E core earnings at RM1.30b and RM1.36b, respectively. Our valuation of RM26.10 is also maintained, based on 21.2x Fwd. PER applied on CY14 EPS of RM1.23. The 21.2x Fwd. PER is pegged at +1.0SD over KLK’s 5-year Average Fwd. PER as we reckon KLK has the best FFB growth outlook among the big cap planters. 

Source: Kenanga