KLK remains a solid, well-focused plantation
company that we like, but valuations are too rich, in our opinion. Although it
would suffer as a result of lower CPO prices, we believe this would be somewhat
offset by improved margins at its downstream operations due to its integrated business
model. KLK’s new and expanded downstream facilities coming on stream sometime
in CY13 would also help mitigate the effect of lower CPO prices on its upstream
business.
Key visit highlights from our recent meeting with Roy
Lim, KLK’s group plantations director: (1) Impressive FFB production growth so
far, but expected to moderate; (2) Some forward sales done for 1QFY09/13, but
not much left to be unwound; (3) Bearish view on prices proven right so far;
(4) Leveraging on price gap between spot and futures prices on MDEX; (5)
Production costs expected to fall slightly yoy; (6) New planting on track in
Indonesia, no detailed plans for PNG land yet; (7) CPO feedstock supply important
factor for KLK’s new Indonesian refineries; and (8) Oleochemical expansions in
Indonesia. Germany, Malaysia and China.
Expanding downstream capacities aggressively. With CPO prices on a downtrend, KLK
is seemingly focusing more on its downstream operations at this juncture. It is
on track to complete its three refineries and one oleochemical plant in Indonesia
by end-CY13, while it would also complete expansions at its existing oleochemical
facilities in Malaysia, Germany and China within this CY13.
Forecasts and Investment case. We have revised our forecasts up by
1-6% for FY09/13-15. Post-earnings revision, we have raised our SOP-based fair
value for KLK to RM22.00 (from RM21.80). No change to our Neutral rating.
Although KLK would suffer as a result of lower CPO prices, we believe this
would be somewhat offset by improved margins at its downstream operations due
to its integrated business model. KLK’s new and expanded downstream facilities
coming on stream sometime in CY13 would also help mitigate the effect of lower
CPO prices on its upstream business.
Source: RHB
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