PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 14 Nov 2019, 9:44 AM


Kuala Lumpur Kepong - Value Emerges

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Kuala Lumpur Kepong (KLK)’s share price tumbled last Friday, down 6.8% to a 4-year low of RM21.24 after news of 31.6m shares or 2.97% of its share capital transacted off-market with a 7.8% discount at RM21/share. Trading at a forward PER of 28x, we think KLK’s valuation looks compelling. We upgrade KLK to Outperform call with a higher SOP-based TP of RM24.87 after raising our PER valuation on the plantation segment from 21x to 23x as we are turning positive on the sector due to an anticipated drop in global inventories. As a result, we revise up our FY20-21F earnings forecasts by 5-6% after raising our CPO price forecast for 2020 by 9% to RM2,400/mt in anticipation of falling global palm oil inventories as we see few key catalysts that could lead to global demand outpacing supply.

  • Cashing out at a discount. We believe the block of shares belongs to a foreign party and the reason of selling remains unknown. We suspect it could be associated with the poor publicity caused by recent allegations that KLK was one of the few plantation companies that caused forest fire in Indonesia.
  • To recap. The Group has recently confirmed that there was a forest fire in one of its estates in Riau, Indonesia. An occurrence of a hotspot area affected 2.8ha in the 14,400ha estate managed by its subsidiary, PT Adei Plantation and Industry. The company also confirmed that 4.25ha of the estate, including an isolation area, has been sealed off for investigations by the Indonesian authorities.
  • Valuation looks appealing. We think it is an opportune time for investors to relook at KLK’s valuation, which is trading at a forward PER of 28x, below the industry average of 33x. We see better earnings outlook in FY20F in tandem with the gradual recovery in CPO prices. Upstream plantation segment should see strong earnings recovery though manufacturing segment is expected to be affected by higher feedstock costs.
  • Turning positive on the palm oil sector. We believe the worst is over for the plantation sector after suffering from a sluggish CPO price performance over the last 2 years. CPO prices should rebound gradually in anticipation of falling global palm oil inventories as we see few key catalysts (i.e. stronger demand from China and the biodiesel industry) from the supply and demand factors that could contribute to a lower stock level in Malaysia and Indonesia. Hence, we raise our average CPO price assumption from RM2,200/mt to RM2,400/mt in 2020.

Source: PublicInvest Research - 7 Oct 2019

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