KLK remains our top big cap sector pick in Malaysia due to its still-strong earnings growth on the back of rising CPO prices and improving downstream margins. Our SOP-based TP of MYR26.40 (12% upside) implies an EV/ha of USD33,770, which is in line with its big-cap Malaysian peers. KLK is also highly leveraged to CPO price where every MYR100/tonne change affects earnings by 5-7%

Top big cap pick in Malaysia. KLK remains our top big cap pick in the Malaysian palm oil space. We expect it to post a four-year earnings CAGR of 16% on the back of higher CPO prices resulting from El Nino as well as improving capacity utilisation at its Indonesian refining facilities, most of which have turned profitable.

Moderation of FFB growth going forward. Despite a stronger-than-expected FFB production growth of 11% YoY in 1Q16, we expect this to moderate going forward, as the delayed impact of El Nino starts being felt. We are keeping our more conservative 1.5% FFB growth target for FY9/16 for now. We also expect margins for the downstream divisions to continue in the positive realm, particularly on the back of the price advantage Indonesian refining facilities have over Malaysia. Currently, KLK’s Indonesian refining facilities comprise about half of the groups’ total refining capacity.

Key risks include the reversal of CPO price trends as well as weaker-than expected demand.

BUY maintained. Our SOP-based TP is raised slightly to MYR26.40 (from MYR25.50) after updating for KLK’s latest net debt and raising our plantation division target PE to 20x (from 19x). We highlight that this is supported by an EV/ha of USD30,000-40,000/ha, which is in line with its big-cap Malaysian peers (Figure 6).