Kuala Lumpur Kepong - Young trees to underpin long-term growth BUY

- Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM23.15/share.

- On the back of a recovery in FFB yields, we forecast KLK’s FFB production to expand by 13% in FY13F after a 1% decline in FY12. KLK’s strength lies in the young age of its oil palm trees as reflected in the average age of 10-11 years old.

- Most of the group’s young trees are in Indonesia, accounting for 51% of planted areas. We estimate that Indonesia accounts for more than 40% of the group’s FFB production.

- We also understand that the group’s operations in Lahad Datu, Sabah have not been affected by the crisis. KLK’s refinery and harvesting operations are still running. About 7.7% of KLK’s landbank is in Lahad Datu. Approximately 23% of the group’s mature areas are in Sabah.

- Manufacturing profits are envisaged to improve by 37% in FY13F after a decline of 17% in FY12, dragged by poor margins and demand. We have not accounted for earnings contributions from KLK’s new refineries in Indonesia in our earnings forecasts.

- Based on a conservative pre-tax refining profit margin of US$10/tonne (RM31/tonne), we estimate that the three refineries in Indonesia could contribute RM39mil or 3% in earnings to KLK. The bulk of the earnings would come in FY14F when all three refineries are up-and-running.

- KLK’s refinery in Belitung is expected to commence operations in the next few months, while the remaining two in Sumatra are targeted for commissioning by year-end.

- All in, KLK’s refineries in Indonesia are envisaged to command a capacity of 1.26mil tonnes/year or 3,600 tonnes/day when they are fully operational. The costs of the refineries are estimated at RM150mil in total.

- A key risk would be a glut in refining capacity in Indonesia. According to an industry expert, refining capacity in the country is estimated to climb from 25mil tonnes in 2012 to 30mil tonnes in 2013F. In comparison, Indonesia’s CPO production is forecast at 29mil to 30mil tonnes for 2013F.

- We forecast a dividend yield of 3% to 4% for KLK in FY13F. Gross dividend is anticipated to rise from 65 sen/share in FY12 to 68 sen/share in FY13F. Balance sheet is expected to remain healthy, in spite of a small increase in net gearing from 1.7% in FY12 to 9.7% in FY13F.

Source: Kenanga