RHB Research retains buy on KL Kepong, TP RM26.25

  • Analyst Reports
  • Monday, 21 Oct 2019

RHB Research maintains Buy for KL Kepong, with a slightly lower SOP-based TP of RM26.25.

KUALA LUMPUR: RHB Research is maintaining a Buy call on Kuala Lumpur Kepong with a slightly lower sum-of-parts derived RM26.25 target price from RM28.35, which is a 22% upside plus 2% yield.

“We believe the recent pullback in KLK’s share price, due to share placement at a discount and subsequent profit taking, is a good buying opportunity.

“KLK’s foreign shareholding is now 14.6%, the lowest level in the last two years, although still above the 10-year low of 11%. The current price implies a CY20 P/E of 27 times, at an attractive discount to its peers’ 30-35 times, ” it said on Monday.

Given the dry weather experienced at its Riau and Kalimantan Tengah estates, where the months of July and August had very little rain, KLK believes that the peak production months could already be over for 2019.

For FY19 (Sep), KLK recorded a 5.3% YoY rise in FFB output, in line with its 3%-5% projection and slightly above its4% forecast.

For FY20, KLK expects FFB growth to remain around 4%-5%, with the bulk of the growth coming from its Indonesian estates.

Its Malaysian estates are likely to record flattish to negative FFB growth in FY20, due to its replanting activities and older age profile. We leave unchanged our 4.2% FFB growth forecast for FY20.

RHB Research pointed out KLK’s unit costs still amongst the lowest of peers. In terms of unit costs, KLK estimates its average unit costs at RM1,450 to RM1,500 tonne, excluding palm kernel credit for FY19.

“KLK has already completed its manuring programme for FY19, but has not yet tendered for its FY20 fertiliser requirements. Costs should remain relatively stable going forward, barring any significant increase in fertiliser prices.

“KLK remains one of the most efficient industry players in terms of operating costs, on par with those of IOI Corp and United Plantations, ” it said.

RHB Research said KLK decided to take advantage of the low interest rate environment by issuing RM2bil worth of Islamic sukuk bonds at the end of September.

While KLK does not have any specific use for these bonds at the moment, the amount may be useful should any M&A opportunities come by.

At end-3Q19, KLK’s net gearing was still relatively low at 24%. KLK is still on the lookout for M&A opportunities in the form of plantation landbank in Indonesia as well as downstream assets in the specialty chemicals space.

“However, the pricing gap between buyers and sellers remains large, at US$2,000 to US$3,000/ha, despite the lower CPO price environment.

“Maintain BUY, with a slightly lower SOP-based TP of RM26.25. We tweak our FY19-21 forecasts down by 1%-7% after imputing higher replanting targets and higher capex assumptions.

“Our TP contains an unchanged 30x 2020 target P/E for its plantation unit, 15 times for its manufacturing unit and a 60% discount applied to the RNAV of its property landbank.

“Our P/E target is at 1SD above its historical average, and implies a fair EV/ha of US$35,000, in line with its peers’ range of US$30,000 to US$40,000. KLK’s 60-65% exposure to upstream operations will be useful in a CPO price upcycle, ” RHB Research said.

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