HLIB Research maintains Hold on KLK, ups target to RM20.45

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KUALA LUMPUR (July 30): Hong Leong IB Research has maintained its “Hold” rating on Kuala Lumpur Kepong Bhd (KLK) with a higher target price of RM20.45 (from RM20.17) and said KLK clocked in only 1.6% growth in its 9MFY09/15 FFB production due to the lagged impact from dry weather condition in end-13, which has in turn affected FFB yield at its Sabah planted land bank.

In a note today, the research house said given the year-to-date fresh fruit bunch (FFB) output growth, and Hari Raya holidays in Jul-15 (which will have an impact on FFB yield), management believes its overall FFB output growth to slow to 1-2% in FY09/15 (from 3.5% in FY09/14).

HLIB Research said crde palm oil (CPO) production cost in FY09/15 to increase to RM1,300/tonne (from RM1,197/tonne in FY09/14), mainly on the back of higher fertilizer cost (which is denominated in US$).

It said while the downstream segment may have seen its worst (evidenced by a rebound in profitability since 1QFY15), management feels that margins will likely remain low, as operating environment remains challenging.

“Capex will decline from an average of RM1 billion per annum for the last 2 years to RM600 million-RM700 million in FY09/15, given the absence of significant new planting activities (which in turn was driven by regulatory issues in Liberia and Indonesia) and major investments at the downstream segment.

“We cut our FY09/15-17 net profit forecasts by 3.7-5%, largely to account for a lower FFB yield assumption for FY09/15, and lower EBIT margin assumption at the downstream segment.

“SOP-derived target price on the stock was raised marginally (by 1.4% from RM20.17 previously) to RM20.45 as we updated our valuation parameters. Maintain Hold,” it said.