Kuala Lumpur Kepong Bhd
(Jan 7, RM21.80)
Maintain “neutral” with a lower target price (TP) of RM21.82 from RM23.27: Management guided that the manufacturing sector could be a drag on the company’s earnings given the weaker crude oil prices, while refining activities would also face stiff competition from Indonesia. We are keeping our neutral recommendation on Kuala Lumpur Kepong Bhd (KLK) with a lower TP of RM21.82 from RM23.27 after reducing our earnings forecast by 12% to 15% for the next three years due to the weaker outlook on the manufacturing sector.

Management projected a 5% to 8% fresh fruit bunch (FFB) production growth following a 3.5% year-on-year (y-o-y) growth in financial year 2013 (FY13). This is also higher than our estimates of a 4.2% FFB production growth. It also guided that the cost of production would be slightly higher than last year’s cost of RM1,200 per tonne, premised by higher fertiliser cost and higher wages in Indonesia.

The group has allocated higher capital expenditure (capex) for this year, at approximately RM1 billion. About RM500 million would be earmarked for its oleochemical facilities and the remainder would go to new plantings of 1,000ha to 2,000ha in Indonesia, which only has about 10,000ha plantable land bank left and is expected to be fully planted in the next three years.

The group has a total planted land bank of 90,095ha in Malaysia, 104,814ha in Indonesia and 5,688ha in Liberia, while unplanted land bank stands around 10,000ha. 

Given limited expansion opportunities in Indonesia, the group has ventured into Papua New Guinea and Liberia in the last two years, acquiring a total land bank of 31,539ha. The average age profile of the group’s planted area is 11 years with 87,930ha or 43% of total planted area planted with immature oil palm trees.

The group still owns about 600ha of freehold agricultural land in Sungai Buloh, which is able to generate a further gross development value of RM5 billion to RM7 billion for its property division.

With the Rubber Research Institute’s development successfully taking off, coupled with the affordable pricing for its township development in Bandar Seri Coafields, we see the property arm neither being significantly affected by cooling measures imposed of late, nor the forthcoming implementation  of the goods and services tax.

The group plans to roll out more double-storey houses and shoplots in the coming months.

Meanwhile, the group expects the land swap deal with UEM Sunrise Bhd in Iskandar Malaysia to be completed by mid-2015. — Public Investment Bank Bhd, Jan 7.

This article first appeared in The Edge Financial Daily, on January 8, 2015.