KL Kepong - Risk of squeeze in oleo margin in Malaysia

Date: 29/01/2021

Source  :  AmInvest
Stock  :  KLK       Price Target  :  24.80      |      Price Call  :  HOLD
        Last Price  :  19.12      |      Upside/Downside  :  +5.68 (29.71%)

Investment Highlights

  • We maintain HOLD on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM24.80/share. Our fair value for KLK is based on an FY21F PE of 27.0x.
  • Although KLK’s oil palm estates in Sabah and Indonesia experienced wet weather recently, the group did not face harvesting and fruit evacuation issues.
  • In Malaysia, we understand that KLK was not significantly affected by the heavy rains in Johor. We estimate that about 10.0% of KLK’s oil palm estates are located in Johor.
  • There were floods in certain areas in Kelantan. However, KLK’s exposure to Kelantan is small at only about 4.2% of total planted areas of 212,766ha of oil palm.
  • As for labour shortage, KLK alleviated the problem by training some of the general workers to harvest FFB during the peak production period. As the peak production season is over, the general workers can now return to their normal job functions such as manuring. We believe that most industry players in Peninsular Malaysia are facing a labour shortage of 5% to 10%. Labour shortage is not as acute in Sabah.
  • We forecast KLK’s manufacturing EBIT (oleochemicals, gloves and parquet) to decline by 7.0% in FY21F due to an erosion in EBIT margin resulting from a higher cost of raw materials. Oleochemicals accounted for 87.9% of manufacturing EBIT in FY20 while gloves and parquet flooring made up the balance 12.1%.
  • Also, we reckon that KLK’s oleochemical plants in Malaysia are currently facing stiff competition from their Indonesian counterparts. We believe that downstream companies in Indonesia are enjoying a lower cost of raw materials compared with Malaysia due to the country’s CPO export tax and levy. We understand that the price discount between CPO in Malaysia and Indonesia was as large as RM1,000/tonne at the peak.
  • On a positive note, we forecast KLK’s FFB production growth to be 4.0% in FY21F (1QFY21: -0.4% YoY) (FY20: - 4.3%). This is expected to be underpinned mainly by a net increase of 2% in mature areas and better FFB yields. We have assumed an average FFB yield of 22.5 tonnes/ha for KLK in FY21F compared with 22.0 tonnes/ha in FY20.
  • We envisage KLK’s share of associates (mainly 20.1%- owned Synthomer PLC) to increase by 78.1% to RM42.0mil in FYE9/21F in the absence of impairments. Synthomer recorded net charges of £63.1mil partly due to a streamlining exercise in FYE12/20.

Source: AmInvest Research - 29 Jan 2021

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