Valuation / Recommendation

We have a SUBSCRIBE recommendation on MKH Oil Palm (East Kalimantan) Bhd (MKHOP) with a FV of RM0.80 based on 14x FY24F EPS, translating to 29% upside to IPO price. Our target PE is at a 25% discount to Malaysian’s peers average PE, considering MKHOP’s smaller market capitalisation. We like MKHOP for the favourable age profile and superior FFB yield of its plantation, which would be a compelling play should crude palm oil (CPO) prices remain high.

Investment Highlights

Prime plantation profile. Currently, 95% of MKHOP's plantation area is comprised of prime mature oil palms (aged 10-16 years), while the remaining 5% consists of young mature oil palms (aged 4-9 years). This favourable age profile has contributed to MKHOP achieving an average Fresh Fruit Bunch (FFB) yield of 24.1 MT/ha for FY23, far ahead of the average FFB yield in East Kalimantan, which stands at 17.4 MT/ha. We anticipate MKHOP’s FFB yields to improve further to 25.5MT/ha and 26.5MT/ha in FY24 and FY25 respectively, indicating a rebound from the adverse impacts of La Nina in previous years. This would help to drive a modest 4-6% growth in FFB production for FY24-25, and similarly for its CPO production on the back on stable oil extraction rate of 20-21%. Overall, we believe MKHOP’s plantation output should remain prime for years to come, while its planned acquisition of 5,000ha of land post-IPO would add ~27% to its plantation landbank and start contributing from FY28 onwards.

Significant margins improvement in FY24-FY25. Despite achieving better ASP, the margins for MKHOP had been on a downtrend since FY21 mainly due to the spike in fertiliser and labour costs. We see FY24 as a key turning point for the company, as a combination of favourable CPO prices and lower production costs (i.e. fertiliser and fuel) should help to significantly boost MKHOP’s EBIT margins recovery to 22-24% in FY24- 25 (from a low of only 14% in FY23).

Based on market forecast, we have assumed MKHOP to achieve a stable CPO ASP (Indonesia domestic price) of RM3,500/3,400 per tonne in FY24-25 (vs. RM3,350/tonne realised in FY23). For sensitivity analysis, we estimate for every RM100/tonne increase in our CPO price assumptions, MKHOP’s FY24-25 earnings will rise by 3% respectively.

Risk factors for MKHOP include (1) Fluctuation in the market prices of CPO and PK; and (2) Adverse weather conditions affecting FFB yield.

Source: Mercury Research - 12 Apr 2024