PETALING JAYA: RHB Research is keeping a “buy” call on Kuala Lumpur Kepong Bhd (KLK) with a higher target price of RM27.10 from RM26.65, considering the group’s listed investments’ current market prices and its latest stake in Aura Muhibah Sdn Bhd.
Last year, KLK’s stake in property developer Aura Muhibah rose to 60% after UEM Land Bhd disposed 20% of its stake in the property developer to KLK.
The research house said its target price comprised an unchanged forecast 25 times price-to-earnings ratio (P/E) for the financial year 2021 ending Sept 30 (FY21) for the plantation units, 15 times P/E for the manufacturing business and a 70% discount applied to the revalued net asset value (RNAV) of its property landbank.
“KLK remains our top big-cap pick in Malaysia.
“This is as its valuation remains undemanding at 25 times P/E for FY21 compared to its peers at 28 times to 36 times, ” it noted.
Meanwhile, the group’s Indonesian downstream activities appear to be a solid buffer, as its refineries in Indonesia are expected to benefit from the current Indonesian tax structure.
With 53% of KLK’s landbank in Indonesia, RHB Research said that up to 70% of its crude palm oil (CPO) from its estates is supplied downstream to its own refineries, resulting in the group benefiting from Indonesia’s tax structure.
As KLK’s third refinery plant is expected to be completed in August next year, it noted that the group’s CPO channeled to its own refineries would rise to 90% from the current 65% to 70%.
Moreover, the group also plans to expand total capacity of its oleochemical plants by 5% by next year.
Currently, the utilisation rate of its oleochemical plants stands at 90%.
As such, RHB Research said its downstream refineries’ earnings before interest and tax (EBIT) margins should improve by high single digits for FY21 from 5.3% in FY20.
“Nevertheless, we keep our 5% to 6% margin assumptions for forecast FY21 to FY23, ” it added.
For FY21, RHB Research is maintaining its more conservative 4% year-on-year (y-o-y) production growth projection.
KLK has reiterated its growth guidance of 10% y-o-y for FY21 premised on 12,000ha of new area coming into maturity.
“However, KLK noted that if the current heavy rainfall and restrictions on foreign hiring persist, this would put downward pressure on its forecasts.
“KLK is currently experiencing a 10% labour shortage in West Malaysia, while the situation in Sabah remains manageable, ” it said.
RHB Research is wary on the group’s foray into the glove manufacturing segment, given the immense supply expansions of the glove sector globally and the shortage of nitrile butadiene rubber at present.
“Glove manufacturing is not new to KLK, as it already has a 65-million capacity reusable glove plant that has been running for more than 20 years. We have not imputed this into our forecasts yet, ” it said.
KLK is building a new nitrile glove plant, with a production capacity of 4.5 billion pieces per year, in Perak. This facility will contain 15 production lines worth RM200mil.
The first phase is expected to be completed by the first half of next year, with the first line to commence by June or July this year.