Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a higher fair value of RM23.30/share (vs. RM21.85/share previously). Our fair value for KLK is based on an unchanged FY23F PE of 22.0x. We ascribe a three-star ESG rating to KLK.

• We have raised KLK’s FY22F net profit by 23.4% to account for a lower effective tax rate of 21.0% (FY21: 21.0%) vs. 30.0% previously. We believe that KLK would not be significantly affected by the prosperity tax in Malaysia.

• We have also revised KLK’s FY23F net profit upwards by 6.0% to account for a higher manufacturing EBIT margin resulting from lower feedstock costs. Incidentally, KLK was not hit by the floods, which took place in December in Selangor.

• Currently, KLK is integrating its upstream plantation operations with IJM Plantations (IJMP). In Malaysia, IJMP’s Sandakan operations will report to KLK’s regional plantation director Mah Fah Chin. In Indonesia, IJMP’s units will report to KLK’s regional directors in Sumatra and Kalimantan. IJMP’s CEO and CFO retired last year.

• We estimate that the RM2.7bil acquisition of IJMP would improve KLK’s net profit by 10% in FY22F. KLK’s FFB production is expected to surge by 27.0% in FY22F (1QFY22: 30.0%) due to the acquisition of IJMP. IJMP is envisaged to increase KLK’s mature areas by 29.8%. IJMP has about 55,000ha of mature areas.

• However, we anticipate group FFB yield to soften to 20.5 tonnes/ha in FY22F from 21.4 tonnes/ha in FY21 as IJMP’s FFB yields are weaker than KLK’s. IJMP’s FFB yields have been hovering around 19 tonnes/ha in the past few years, dragged by young oil palm trees in Indonesia.

• We forecast KLK’s ex-mill cost of CPO production (including IJMP) to be between RM1,600/tonne and RM1,700/tonne in FY22F vs. RM1,509/tonne in FY21. Although the costs of fertiliser and wages have increased, these will be partly mitigated by the expansion in FFB production. We think that KLK’s cost of fertiliser would climb by more than 30% in FY22F. This is in tandem with the surge in global fertiliser prices.

• We forecast KLK’s manufacturing EBIT to improve by 5.5% to RM768.0mil in FY22F. We believe that KLK’s manufacturing division would continue to perform well in FY22F on the back of higher selling prices and positive demand. Due to high shipment costs, consumer companies in Europe have switched to locally produced oleochemical products instead of imports. KLK’s oleochemical plants in Germany have benefited from this. We estimate that KLK has about one million tonnes of oleochemical production capacity per year in Europe.

Source: AmInvest Research - 28 Jan 2022