Kuala Lumpur Kepong Bhd 
(July 2, RM22.30)
Maintain buy with an unchanged fair value of RM25.10: Our fair value is based on a financial year ending September 2016 forecast (FY16F) price-earnings ratio (PER) of 25 times. Kuala Lumpur Kepong Bhd’s (KLK) FY16F PER valuation of 21.6 times is cheaper than Felda Global Ventures Holdings Bhd’s (FGV) 24.6 times but close to IOI Corp Bhd’s 21.1 times and Sime Darby Bhd’s 20 times.

Among the big-cap plantation companies, we like KLK for to its young oil palm trees, efficient production costs and healthy balance sheet. The average age of the group’s oil palm trees is only 11 years old compared with FGV’s 15 years, IOI Corp’s 12 to 13 years and Sime Darby’s 14.5 years (excluding New Britain Palm Oil Ltd). 

KLK’s balance sheet is clean. The group’s net gearing stood at 21.5% as at end-March 2015 compared with IOI’s 97.3%, FGV’s 31.1% (before the acquisition of 37% of PT Eagle High Plantations Tbk) and Sime Darby’s 47.2%. We forecast KLK’s fresh fruit bunch (FFB) production to rise 4% in FY15F and 5.5% in FY16F. Most of the improvements in FFB production are expected to be driven by an increase in mature areas. Mature areas are envisaged to expand by 3% each in FY15F and FY16F compared with 4% or 8,549ha in FY14. 

We expect new plantings of oil palm to be slow in Liberia as KLK is currently conducting high carbon stock studies. In spite of this, we reckon that KLK is on track towards replanting about 1,000ha of oil palm trees in the country this year. We estimate the replanting cost at more than RM10,000 per hectare. Manufacturing earnings before interest and tax are expected to decline by 24% in FY15F before recovering by 15% in FY16F. We do not expect the crisis in Greece to affect KLK’s oleochemical operations in Europe significantly. More than half of the division’s profits are driven by operations in Malaysia. 

Also, earnings from the acquisition of Emery Oleochemicals GmbH’s operations in Germany are not anticipated to be significant. We believe that the unit is breaking even. We reckon that KLK would be integrating its fatty acids operations in Emmerich with Emery’s operations in Dusseldorf to reap synergistic benefits. As both plants are located close to each other, we think that KLK would be able to integrate the marketing and distribution networks of the companies. KLK proposed to acquire Emery’s oleochemical assets in Germany for €40.5 million or RM169 million in May 2015. — AmResearch, July 2

This article first appeared in The Edge Financial Daily, on July 3, 2015.