We are raising KLK’s FY22E EPS from 132.0 sen to 187.0 sen (and FY23E EPS from 123.0 sen to 163.0 sen) on firm CPO prices and significant expansion upstream. After buying 56% in IJM Plantations (IJMP) in September, KLK has raised its holding to 95% of IJMP in November. PT Pinang Witmas Sejati (PWS) also became a 60% subsidiary in October. As both of their estates are mostly planted, KLK’s FFB output is set to increase by 25% from FY22 onwards. Net gearing may exceed 0.5x during FY22 but should dip to 0.3x by FY23 on strong cash-flows. Maintain our OP with an upgraded TP, from RM26.50 to RM30.00 @ FY22E PER of 16x (-1.0SD). ESG score is 78%.

Sizeable upstream expansion: Beginning from FY22, KLK has added 30% more planted area thanks to two investments: (a) 95% in IJMP which owns seven mills and 76,183 Ha in Sabah, Sumatra and Kalimantan, 80% of which are planted, and (b) the smaller investment of 60% in PWS which also comes with a mill and 14,980 Ha in Sumatra, out of which 96% has been planted up. KLK’s oil palm area has effectively grown from about 225K in FY21 to 300K Ha in FY22.

Adding a million MT of FFB: IJMP typically produces 0.9m to 1.1m MT of FFB a year while a 60% share in PWS output should translate to around 0.1m MT of FFB. So from FY22 onwards, we expect 5m MT of FFB output a year from KLK, up from around 4m MT annually over the past few years.

Note that though KLK paid about half the consideration in FY21, IJMP contributed less than month’s earnings. KLK bought 56% in IJMP on 6 September 2021 or three weeks before its September financial year-end in FY21. The 60% investment in PWS was completed just after FY21, on 1 October 2021. Essentially, both investments will contribute meaningfully from FY22 onwards. KLK also increased its stake in IJMP to 95% as of mid-November.

Timely acquisitions: KLK bought IJMP for 8x EV/EBITDA on IJMP’s March FY21 results but only 6x EV/EBITDA if annualised 1H FY22 earnings is adopted due to much stronger profit due in FY22 for IJMP. Arising from the acquisitions, KLK’s net gearing may exceed 0.5x during FY22 but should dip back to 0.46x by end FY22 and 0.3x by FY23 thanks to strong cash-flows. Acquisition EV per planted Ha of US$13k is quite fair, falling within the replacement cost of US$12- 18k per Ha needed to buy and plant oil palm on Hak Guna Usaha (HGU) land in Indonesia.

RM2b Core Profit for FY22. We are revising up the CPO price for KLK in FY22 from RM3,000 to RM3,800 per MT and adjust for the higher 95% stake in IJMP. CPO prices may have eased from record levels in Oct/Nov 2021 due to expected bumper soya bean harvest. However, until supply recovery does flow through and inventory indeed improved, the oils & fats market remains tight with minimal ability to digest news which might disrupt CY22 harvest. Hence, CPO price downside may be limited for another 3-6 months. KLK’s FFB output is also expected to hit 5.0m MT in FY22 and 5.5m MT in FY23, up from 4.0m to 4.1m MT, respectively, thanks to the timely upstream investments.

Reiterate OUTPERFORM with a higher TP of RM30.00 (up from RM26.50) based on CY22E PER of 16x (in-line with large cap peers’ average), reflecting -1.0SD valuation. Based on our ESG scoring, KLK ranks third with a score of 78%, while IJMP scores 74%. Key risk to our call is a sharp decline in CPO prices.

Source: Kenanga Research - 3 Jan 2022