• MYR0.66 FV based on 12x FY25F P/E. MKH Oil Palm intends to raise MYR136.4m from its IPO, mainly to fund its expansion of landbank for oil palm plantation, upgrading works and the setup of PK crushing facility. MKHOP’s young topographical profile should boost its FFB output, propelling its 3-year earning CAGR of 25% from FY24F-26F. As such, we believe its valuation is attractive, with an implied P/E based on the IPO price of 12x 2025F, ie a 3x discount to its 4-year historical peer market cap weighted average of 15x.

• Young age profile. As at last practicable date (LPD), the group’s average age is at 11.5 years, with roughly 95% in prime mature stage (10-16 years), while the remaining will soon enter peak production. As such, we expect no replanting activities to be done in the next few years, and should not pose any hindrance towards production. Moving forward, we see that the prospects of FFB production will be driven by this age distribution, as well as normalisation of weather, with FFB growth range of 4-6% for FY24-26F.

• Utilisation of enhanced mechanisation. MKHOP has developed a custom mobile application, RondaApp, to record the growth conditions of its oil palm and update the progress of FFB collection and evacuation. This technology allows workers to effectively address any issues faced regarding road conditions, unhealthy oil palm or pest attacks. Additionally, the implementation of hydraulic lifting arms into powered wheelbarrows and the usage of allterrain vehicles (ATVs) for FFB collection minimises transportation time of FFB collection to palm oil mills, as opposed to crawler dumpers, which have lower manoeuvrability. The increased productiveness helped the group to maintain higher CPO yield vs the national average, almost by 2x.

• Decent dividend payout. MKHOP has a dividend policy to payout at least 50% of its PAT to shareholders. This translates to above average dividend yield of 4- 5% based on our FY24F–26F. Note: As at LPD, the group is sitting on a net cash of MYR73m and has a negligible amount of debt at MYR2m. We believe that it will continue remain in a net cash post-IPO as it has adequate IPO proceeds for capex and working capital expenses, along with sufficient retained earnings. This also leaves MKHOP with no restrictions to continue maximising shareholders’ return.

• Attractive valuation. We project a 3-year earnings CAGR of 25% from FY24F- 26F and ascribe a P/E of 12x to its FY25F earnings to arrive at our FV of MYR0.66. Our target P/E is at a 3x discount to its 4-year historical peer market cap weighted average of 15x.

• Key risks include CPO price downtrends, weather risks and worsening labour situation.

Source: RHB Securities Research - 16 Apr 2024