Kuala Lumpur Kepong - Big-cap plantation proxy BUY

- Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with an unchanged RNAV-based fair value of RM25.90/share. 

- KLK is a large-cap proxy to the plantation sector.  We believe KLK’s premium valuation is justified due to its younger oil palm trees and purer plantation exposure.  

- Average age of KLK’s oil palm trees is 10.7 years old compared with IOI Corporation’s 14-15 years and Sime Darby’s 14 years. More than half of Felda Global Ventures’ oil palm trees are 21 years old and above.

- About 84% of KLK’s FY11 EBIT came from the plantation division versus 61% for IOI and 55% for Sime Darby.  

- Like the other plantation companies, we reckon that KLK’s net profit in FY12F would not be exciting due to the fall in CPO production and prices. 

- However, we expect the group’s net profit to resumegrowing at a rate of 15% in FY13F.  

- Underpinning the rise in net profit in FY13F is an anticipated 10% recovery in FFB production and improvement in manufacturing earnings. 

- KLK’s FFB output is envisaged to ease 1% in FY12F. Weak palm oil production in Sabah is expected to be partly cushioned by an expansion in output in Indonesia. KLK’s FFB production in Sabah recorded a double-digit percentage YoY decrease in 9MFY12. 

- We forecast manufacturing EBIT to inch up 2.4% to RM232mil in FY12. After inventory write-downs, which resulted in the division recording a loss of RM40.9mil in 4QFY11, we expect manufacturing margin to stabilise in FY12F. 

- Balance sheet is anticipated to remain healthy. 

- We estimate KLK’s cash reserves to increase to RM2.2bil in FY12F on the back of the issuance of RM1bil 10-year Islamic medium-term notes. 

- This would place KLK in a comfortable position to finance any expansion into plantation or manufacturing in the future. 

Source: AmeSecurities