Kuala Lumpur Kepong Bhd
(Oct 20, RM20.52)
Upgrade to “buy” with target price of RM23.04: The short-term crude palm oil (CPO) price outlook remains weak, and unanticipated development has affected geographical diversification plans.

However, we continue to believe in the good long-term potential for CPO, and Kuala Lumpur Kepong or KLK offers: i) good plantation management; ii) a large planted area with an excellent age profile; iii) a strong fresh fruit bunch (FFB) production growth for many years; iv) monetisation of well-located plantation land bank and potentially higher exposure to property development; and v) a strong balance sheet to support growth.

The size of the plantation land acquired in Papua New Guinea (PNG) has shrunk to just 5,992ha from 44,342ha following the decision of the PNG government not to pursue suits by claimants. The Ebola outbreak has also affected plans to develop new areas in Liberia. However, excluding PNG and Liberia, KLK’s land bank of 246,819ha and planted areas of 211,215ha (17,980ha planted with rubber) in Malaysia and Indonesia are still substantial.

Plantable reserve of around 12,000ha in Indonesia is currently being developed at a pace of 3,000ha per annum (p.a.) while replanting of old palms in Malaysia is at a rate of 1,000ha p.a.

Barring extreme weather conditions, we believe FFB production growth could potentially exceed 10%. High young mature (55,520ha) and immature (35,904ha) areas point to further growth in prime areas, which are around 40% of total planted areas. FFB production grew by 11% in financial year 2013 (FY13) and 8% in nine months of financial year 2014. We maintain our FFB production growth assumption of 10% in FY15 and FY16. Cost of production per tonne (MT) of CPO is expected to be stable at around RM1,300/MT.

The omission of the 30% foreign shareholding limit in the recently approved plantation bill has reduced regulatory risks in Indonesia, at least temporarily.  — Affin Hwang Capital, Oct 20

This article first appeared in The Edge Financial Daily, on October 21, 2014.