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This article first appeared in The Edge Financial Daily on January 8, 2019

Kuala Lumpur Kepong Bhd
(Jan 7, RM24.06)
Maintain neutral with an unchanged target price of RM22.86:
We met Kuala Lumpur Kepong Bhd’s (KLK) management and came away with some developments. Despite the weak crude palm oil (CPO) price performance, we expect to see a slow recovery in the company’s earnings for the second half of financial year 2019 (2HFY19). Compared with its industry peers, KLK was not as badly affected by lower CPO prices as it had the oleochemical business to hedge against upstream price exposure. As for valuation, it remains unattractive at 30 times forward price-earnings ratio, likely owing to the integrated business model that helps hedge against the downside risk in CPO prices.

 

Management expects to see the current weak CPO price performance remains the key challenge to its 1HFY19 plantation segment. Meanwhile, the oleochemical segment is expected to maintain its performance with higher capacity utilisation and operational efficiencies. It expects to see CPO prices hovering around RM2,100 to RM2,200 per tonne for the next three months. On fresh fruit bunch (FFB) production growth, management expects to see FFB production surpassing the four million tonne level for FY19, with an expected growth of 5% to 6%. The higher production growth will be contributed by an estimated 10,000ha of plantation area coming into maturity as well as improving yields given its young age profile of 12.1 years for the existing mature area. The property segment is expected to perform favourably this year on the back of steady unbilled sales of RM121 million and an ongoing project called Hemingway Residences in Bandar Sungai Buloh, which consists of superlink terrace houses and semi-detached homes.

Though the group has a sizeable planned capital expenditure (capex) of RM900 million, it intends to spend only half of it. About 70% of the capex will be spent on the plantation segment as it plans to replant a bigger area of 10,000ha in Lahad Datu and Riau compared with only 5,800ha last year due to bad weather condition and contractor issues. It also includes the construction of a joint-venture-owned new refinery and jetty in East Kalimantan. The remainder will be allocated for the capacity expansion of the oleochemical business, which is currently running at the maximum level.

Following the implementation of the new minimum wage of RM1,100 a month effective this year, the group sees a small impact of -2% on its group’s bottom line. However, the more worrying issue is the minimum wage hike in Indonesia this year as the general election is expected to be held soon. A bumper hike of 10% to 20% is anticipated, which made the general worker wage almost on a par with Malaysia’s level.

The group has a planted area of 7,888ha in Liberia, which makes up 3.6% of total group plantation area. It has started commissioning a 30-tonne-an-hour palm oil mill in Palm Bay. It is currently constructing bulking facilities in Buchanan to facilitate bulk shipments of its CPO in the future. — PublicInvest Research, Jan 7

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