We reckon that the government’s move to slash crude palm oil (CPO) export taxes for three months (January 2018-March 2018) is positive over the short term for upstream Malaysian planters as it will help boost exports of the commodity. Nevertheless, the short-term gains could be offset by the European Parliament vote to ban palm oil as biofuels from 2021 in order to prevent deforestation and to meet climate goals. Over the past couple of years, Europe is Malaysia's second-largest export markets for palm oil with 30.0% consumed for biodiesel.
In the meantime, we note that KLR has proposed a series of corporate exercise which entails: (i) share split involving every one existing ordinary share divided into three new KLR shares, and (ii) bonus issue of one free warrant for every twenty subdivided shares held after the proposed share split. We view the aforementioned corporate exercise, expected to be completed by end of 2Q2018, to be slightly positive as it not only improve the liquidity of the group’s shares, but also as a reward to existing shareholders via the issuance of free warrants. Meanwhile, we also expect KLR to return to a Shariahcompliant company on the next update in end-May 2018.
We continue to like KLR as one of the most efficient local crude palm oil planter with a superior yield per hectare vs. Malaysia’s average over the past years. We view the recent weakness in CPO prices to be short-lived as demand from China will pick-up in 1Q2018 amid the festive season, while the recent cut in CPO export tax could also boost demand over the near term.
With its 9MFY18 net profit already hitting RM79.8 mln, the company is largely on track to meet the RM100.0 mln mark in FY18. Consequently, we lift our earnings forecast marginally higher by 0.7% and 0.2% to RM100.9 mln and RM104.1 mln for FY18 and FY19 respectively, accounting for the stronger-than-expected production.
We also maintain our BUY recommendation on KLR with an unchanged target price of RM4.65 as we ascribed an unchanged target PER of 14.0x to its revised FY19 EPS of 33.4 sen. The ascribed target PER is in line with the industry average of around 13.5x- 15.5x. At the target price of RM4.65, KLR will trade an implied PER of 14.4x and 13.9x for FY18 and FY19 respectively, which is fair, in our view, given the cyclical nature of the crude palm oil industry.
Risks to our recommendation include fluctuations in the CPO prices. The volatility of CPO prices is subjected to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.
Source: Mplus Research - 6 Feb 2018
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Created by MalaccaSecurities | Nov 15, 2024
Kensington
Based on the monthly production figures, the 4Q of FY2018 is the best quarter so far in terms of FFB harvesting and production of CPO/PK. So I would anticipate a significant improvement in their FY2018 results together with a projected final dividend 9 sen/share (announced ca 29 March), and hope the further announcement of share split and bonus warrant will bring some cheers to our loyal investors.
2018-03-21 16:33