KLK stable amid uncertainties

Kuala Lumpur Kepong Bhd (July 8, RM22.38)

Maintain hold with a target price (TP) of RM22.79: In the midst of global economic and stock market uncertainties, Kuala Lumpur Kepong Bhd (KLK) offers strong management; steady earnings and dividend yields; large oil palm plantation land bank and planted areas with an average age fast approaching ideal; and healthy balance sheet.

However, given a modest crude palm oil (CPO) price outlook, we maintain our “hold”. After declining 3.6% year-on year (y-o-y) in the first half of 2015, we expect financial year 2015 (FY15) fresh fruit bunch (FFB) production growth to be capped at around 3%.

The ongoing El Nino, if worsened and prolonged, may also potentially cut FFB production growth in FY16.

KLK’s downstream capacity has expanded significantly after recent investments and acquisitions. Due to more intense competition in the face of weaker demand as well as lower prices of petrol derivatives, its blended margin in FY15 is, however, expected to be lower.

KLK continues to launch more affordable homes to counter sales affected by cooling sales measures introduced by the government. First launches for its joint-venture (JV) property projects in Iskandar Malaysia are still expected in 2017.

We maintain our CPO average selling price (ASP) assumption of RM2,320 per tonne for 2015 and RM2,500 per tonne for 2016 and 2017. However, we cut our FY15 core net profit by 1.2% after trimming our FFB production growth assumption from 4% to 3%.

Our FY16 and FY17 earnings per share are unchanged. KLK has what we view as a strong management team. We maintain our “hold” rating and 12-month TP of RM22.79 (18 times FY16E price-earnings ratio).

Key downside risks include lower crude and vegetable oil prices; high production of vegetable oil and/or changes in rules and regulations; and forex losses/gains.

Key upside risks include significant drop in production and a spike in CPO prices due to the impact of a strong El Nino. — AffinHwang Capital, July 8

This article first appeared in The Edge Financial Daily, on July 9, 2015.