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Thursday, January 5, 2017

Brokers Report: Kuala Lumpur Kepong - Steady Outlook

Retain NEUTRAL with a higher target price (TP) of RM24.90

We had a meeting with Kuala Lumpur Kepong (KLK)’s management recently and came away with a steady view on the company’s outlook. Despite seeing strong CPO price performance, we think current valuation remains unattractive at 23x forward PER. Hence, we maintain our Neutral call but with a higher TP of RM24.90 (up from RM23.46) after rolling over our valuations to FY18.

  • A rebound in FFB production. After experiencing an 8.1% drop in FY16 FFB production, the company expects to see a recovery in FY17 with a 3-5% growth. The growth will mainly come from Kalimantan Tengah, which has seen a dip for 2 consecutive years. Malaysian production may be struggling to see a recovery due to a lagged effect of El Nino’s impact last year.

  • Targeting a steady production cost. Despite expecting an increase in fertiliser and labour expenses, the company targets to keep its production cost (excluding palm kernel credit and milling costs) at RM1,350/mt in FY17, supported by a recovery in FFB production.

  • Expecting additional 6,000ha mature area. It is expected to see an additional 6,000ha mature area this year. Meanwhile, it expects to replant 3,000-4,000ha in Sabah and plans to plant about 1,000- 1,500ha in Liberia. In Indonesia, the group plans to help expand the plasma planted area while no new planting to be carried out for its own area due to high carbon stock studies.

  • Allocating lower capex. The Group has allocated a total capex of RM850m for FY17, down by 7% YoY. About RM500m will be used for new planting expenditure while the remainder will go to maintenance capex for oleochemical business.

  • Mixed fortune for the respective downstream businesses. Specialty oils & fats will see stronger contribution, riding on the tight RSPO oil supplies, which entitle them to more lucrative premium of USD90/mt compared to USD50/mt in the past. On the other hand, oleochemical will continuously face stiff competition from petrochemical though crude oil prices have seen a strong rebound lately. In addition, it will also experience heightening raw material cost due to escalating PKO prices.

  • Property could see a turnaround in 2018. Property unit plans to roll out some small launches soon. With the commencement of MRT Line 1, we believe it will augur well for its property sales given the accessibility to public transportation. Nevertheless, management expects the property demand to pick up in 2018, which will see a turnaround for its property arm.

Source: PublicInvest Research - 05 January 2017

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