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PLANTATION

KL KEPONG
(KLK MK, KLKK.KL)

22 March 2016

FFB output growth still positive YoY in 5MFY16

BUY

Company report

(Maintained)

Gan Huey Ling, CFA


gan-huey-ling@ambankgroup.com

Rationale for report: Company Update

03 2036 2305
Price
Fair Value
52-week High/Low

RM24.18
RM25.10
RM24.78/RM19.60

Key Changes
Fair value
EPS

Unchanged
Unchanged

YE to Sept
Revenue (RMmil)
Net Profit (RMmil)
EPS (sen)
EPS growth (%)
Consensus net (RMmil)
DPS (sen)
PE (x)
EV/EBITDA (x)
Div yield (%)
ROE (%)
Net gearing (%)

Investment Highlights

FY18F

13,650.0 14,059.6 14,841.2 15,377.9


869.9 1,009.0 1,142.3 1,240.3
81.5
94.5
107.0
116.2
(12.3)
16.0
13.2
8.6
1,037.0 1,171.0 1,256.0
45.0
50.0
55.0
57.0
29.7
25.6
22.6
20.8
17.9
16.1
14.4
13.3
1.9
2.1
2.3
2.4
10.0
10.2
11.0
11.3
26.0
32.4
34.0
33.4

FY15

FY16F

FY17F

Stock and Financial Data

Shares Outstanding (million)


Market Cap (RMmil)
Book value (RM/share)
P/BV (x)
ROE (%)
Net Gearing (%)

1,067.5
25,812.2
9.06
2.7
10.0
26.0

Major Shareholders

Batu Kawan Bhd (46.6%)


EPF (13.2%)

Free Float (%)


Avg Daily Value (RMmil)

53.4
26.3

Price performance
Absolute (%)
Relative (%)

3mth

6mth

12mth

+7.5
+2.2

+8.9
+4.3

+7.4
+13.1

Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with an


unchanged fair value of RM25.10/share, which implies a
FY17F PE of 23.5x. In the past seven years, KLKs PE
ranged from a low of 14.0x to a high of 29.6x. Average PE
was 21.7x.
Although there is a possibility that KLKs FFB output
growth may exceed our assumption of 1.8% for FY16F
(FY15: 1.9%), we are keeping our forecast for now to be
conservative. From October 2015 to February 2016, KLKs
FFB production grew by 7.2% YoY.
In spite of the effects of El Nino, it appears that KLKs FFB
yields have fared better than its peers. The groups FFB
output edged up by 1% YoY in the first two months of
2016F compared with declines of 23.9% YoY for IOI
Corporation, 5.2% YoY for Genting Plantations and 3.8%
YoY for IJM Plantations.
We attribute this to KLKs smaller exposure to Sabah. We
estimate that about 16.3% of KLKs planted areas are in
Sabah. Indonesia accounts for a significant 53.0% of
planted areas while Peninsular Malaysia accounts for an
additional 27.7%. The balance 3.0% of KLKs planted areas
is in Liberia.
Apart from the recovery in CPO prices, KLKs plantation
unit is also expected to receive a boost from the
turnaround in the refineries in Indonesia and higher palm
kernel prices in FY16F.
The swing into profitability is envisaged to be underpinned
by a lower feedstock cost resulting from the
implementation of the export levy in July 2015. The
refineries and palm kernel crushing segment in Indonesia
recorded a small loss of RM2.4mil in FY15.
We believe that KLKs manufacturing unit (mainly
oleochemical operations) would be able to sustain its
profitability in FY16F due to the timing of its purchases of
raw materials. We have forecast manufacturing EBIT to
inch up by 2% in FY16F. Most of the oleochemical profits
are expected to be driven by the Malaysia operations.
KLKs foreign shareholding has improved from a low of
11.06% as at end-September 2015 to 11.96% as at endFebruary 2016. In the past five years, the highest level of
foreign shareholding recorded was 19.2% at end-April
2012.

22 March 2016

KL Kepong

CHART 1: ESTIMATED GEOGRAPHICAL BREAKDOWN OF PLANTED AREAS (%)

Liberia, 3.0%

Peninsular Msia,
27.7%

Indonesia, 53.0%
Sabah, 16.3%

Source: Company, AmInvestment Bank Bhd

MAINTAIN BUY WITH UNCHANGED FAIR VALUE


OF RM25.10/SHARE
We are keeping our BUY recommendation on Kuala
Lumpur Kepong Bhd (KLK) with an unchanged fair value of
RM25.10/share, which implies a FY17F PE of 23.5x. In the
past seven years, KLKs PE ranged from a low of 14.0x to
a high of 29.6x. Average PE was 21.7x.
As plantation accounts for 70% of KLKs EBIT, the group is
expected to benefit from the recovery in CPO prices. In
addition, compared with other plantation companies, KLKs
FFB production has not fallen as much. We think that this
is because the group has a more balanced geographical
exposure of oil palm estates.
In spite of falling crude oil prices and rising palm prices, we
reckon that KLK would be able to sustain the profitability of
its manufacturing division due to the timing of its
purchases of feedstock.
Finally, KLKs balance sheet is clean as reflected in its net
gearing of 26.1% as at end-December 2016. Only 28.6%
of the groups borrowings are denominated in foreign
currencies. About 71.4% of KLKs borrowings are in RM.
KLKs foreign shareholding has increased from the trough
of 11.06% as at end-September 2015 to 11.96% as at endFebruary 2016.

UPDATES
FY16F FFB production growth could exceed our

assumption
We have assumed that KLKs FFB production would
improve by 1.8% in FY16F compared with 1.9% in FY15.
From October 2015 to February 2016, KLKs FFB output
rose by 7.2% YoY.
AmInvestment Bank Bhd

Although there is a possibility that KLKs FFB production


growth would exceed our assumption for the full year, we
are keeping our forecast to be conservative.
In spite of the lagged impact of El Nino, KLK has fared
better than its peers. In the first two months of 2016F,
KLKs FFB production inched up by 1% YoY vs. declines
of 23.9% YoY for IOI Corporation, 5.2% YoY for Genting
Plantations and 3.8% YoY for IJM Plantations.
We attribute this to KLKs smaller exposure to Sabah,
which suffered from the effects of El Nino more than
Peninsular Malaysia. We estimate that only 16.3% of
KLKs planted areas are in Sabah.
Peninsular Malaysia accounts for an additional 27.7% of
KLKs planted areas while another 53.0% is located in
Indonesia. The balance 3.0% of KLKs planted areas is in
Liberia (see Chart 1).
In terms of efficiency, we believe that KLKs production
cost per tonne would increase in FY16F due to higher
minimum wage in Indonesia and fertiliser costs. We think
that KLKs group production cost (ex-mill) would be about
RM1,300/tonne in FY16F compared with RM1,268/tonne in
FY15.
In Malaysia, KLKs production cost (ex-mill) is estimated
between RM1,200/tonne and RM1,300/tonne in FY16F
while production cost (ex-mill) in Indonesia is expected to
range from RM1,400/tonne to RM1,500/tonne.
We do not expect significant impact from the hike in the
levy of foreign workers in the plantation sector in Malaysia.
The increase in the levy from RM590/worker to
RM640/worker took effect on 18 March 2016.
As for new plantation developments, we reckon that KLK
would resume its plantings of oil palm in FY16F as the high
carbon stock study on its landbank has been completed.
2

KL Kepong

22 March 2016

New plantings of oil palm are estimated at 3,000ha in


FY16F vs. zero in FY15.
Improved refining profits to support plantation

earnings in FY16F
Apart from the uptick in CPO prices, we believe that KLKs
plantation profits would also improve in FY16F on the back
of a turnaround in the earnings of the refineries in
Indonesia and a boost in palm kernel crushing profits. In
FY15, the refineries and palm kernel segment recorded a
small loss of RM2.4mil.
KLKs refineries in Indonesia have swung into the black
underpinned by lower feedstock cost resulting from the
implementation of the export levy in July 2015. We
estimate KLKs refining capacity at 990,000 tonnes
annually in Indonesia. Palm kernel crushing capacity is
about 200,000 tonnes per year.
Going forward, although the cost advantage of palm
refineries in Indonesia is expected to be eroded by the
imposition of export tax in April 2016 in Malaysia, we
reckon that the Indonesian refiners would still be able to
maintain their competitiveness.
We estimate the difference in the cost of CPO between
Malaysia and Indonesia at RM160/tonne or US$39/tonne
after the imposition of the 5% export tax in Malaysia vs.
RM285/tonne or US$70/tonne previously.
Manufacturing profit to sustain in FY16F
We have forecast KLKs manufacturing EBIT (mainly
oleochemical operations) to inch up by 2% in FY16F. We
have assumed that the units EBIT margin would remain
unchanged at 3.5% in FY16F.
In spite of plunging crude oil prices, which would affect the
selling prices of oleochemicals and rising palm prices,
which are expected to increase cost of production, we
believe that the manufacturing division would be able to
sustain its profitability. This is due to the timing of the
purchases of feedstock.
A large portion of KLKs oleochemical earnings in FY16F is
expected to be driven by the Malaysia and Europe units.
The oleochemical operations in Europe use palm oil-based
feedstock and a little bit of tallow. We think that
oleochemical earnings in China may not be exciting in
FY16F due to the slowdown in the countrys economy.

AmInvestment Bank Bhd

22 March 2016

KL Kepong

TABLE 1 : FINANCIAL DATA


Income Statement (RMmil, YE 30 Sep)

2014

2015

2016F

2017F

2018F

11,130.0
1,701.1
(335.8)
1,365.3
5.9
(51.3)
(2.2)
1,317.7
(285.0)
(41.0)
991.7

13,650.0
1,585.9
(387.7)
1,198.2
(2.4)
(61.2)
1,134.6
(250.6)
(14.1)
869.9

14,059.6
1,807.5
(405.0)
1,402.5
(2.6)
(96.6)
1,303.3
(273.7)
(20.6)
1,009.0

14,841.2
2,045.0
(454.4)
1,590.6
(2.9)
(112.3)
1,475.4
(309.8)
(23.3)
1,142.3

15,377.9
2,229.3
(503.8)
1,725.5
(3.2)
(120.4)
1,602.0
(336.4)
(25.3)
1,240.3

2014

2015

2016F

2017F

2018F

4,220.2
430.2
3,726.9
8,377.3
1,295.8
1,441.4
1,002.1
771.0
4,510.3
393.3
1,094.2
761.3
2,248.8
1,816.2
639.4
2,455.6
7,751.7
431.5
7.26

4,817.7
492.9
5,156.7
10,467.4
2,083.2
1,613.8
1,711.4
1,383.9
6,792.3
713.7
1,912.8
1,096.1
3,722.6
2,681.2
727.7
3,408.9
9,666.4
461.7
9.06

5,312.7
492.9
5,363.5
11,169.1
1,632.0
2,349.7
1,733.4
1,103.4
6,818.5
503.5
2,104.1
1,224.4
3,832.0
2,815.3
716.4
3,531.6
10,141.6
482.3
9.50

5,758.3
492.9
5,590.4
11,841.7
1,634.8
2,454.1
1,829.7
1,171.3
7,089.9
490.8
2,314.5
1,261.7
4,067.0
2,956.0
706.2
3,662.2
10,696.8
505.6
10.02

6,154.5
492.9
5,839.6
12,487.1
1,866.4
2,521.7
1,895.9
1,225.4
7,509.4
504.3
2,546.0
1,285.8
4,336.1
3,103.8
697.0
3,800.9
11,328.6
530.9
10.61

2014

2015

2016F

2017F

2018F

1,317.7
335.8
(937.4)
22.8
739.0
(754.5)
(66.3)
(341.4)
(1,162.2)
550.4
0.0
(614.8)
20.4
(44.0)
(467.2)
1,753.8
(21.8)
1,264.8

1,134.6
387.7
(1,433.5)
377.5
466.3
(730.0)
82.0
(89.8)
(737.8)
1,536.8
0.0
(635.6)
(22.3)
878.9
607.4
1,264.8
183.7
2,055.9

1,303.3
405.0
(839.0)
27.3
896.6
(400.0)
(178.2)
(522.6)
(1,100.8)
314.0
0.0
(533.8)
0.0
(219.7)
(424.0)
2,055.9
0.0
1,632.0

1,475.4
454.4
(560.0)
0.0
1,369.8
(400.0)
(196.0)
(524.9)
(1,120.9)
341.0
0.0
(587.1)
0.0
(246.1)
2.8
1,632.0
0.0
1,634.8

1,602.0
503.8
(492.8)
0.0
1,613.0
(400.0)
(215.6)
(527.4)
(1,143.0)
370.1
0.0
(608.5)
0.0
(238.4)
231.7
1,634.8
0.0
1,866.4

Key Ratios (YE 30 Sep)

2014

2015

2016F

2017F

2018F

Revenue growth (%)


EBITDA growth (%)
Pretax margins (%)
Net profit margins (%)
Interest cover (x)
Effective tax rate (%)
Net dividend payout (%)
Trade debtors turnover (days)
Stock turnover (days)
Trade creditors turnover (days)

21.7
11.6
11.8
8.9
33.2
21.6
59.1
33
56
15

22.6
-6.8
8.3
6.4
25.9
22.1
55.2
46
49
22

3.0
14.0
9.3
7.2
18.7
21.0
52.9
45
70
15

5.6
13.1
9.9
7.7
18.2
21.0
51.4
45
70
14

3.6
9.0
10.4
8.1
18.5
21.0
49.1
45
70
14

Revenue
EBITDA
Depreciation
Operating income (EBIT)
Other income & associates
Net interest
Exceptional items
Pretax profit
Taxation
Minorities/pref dividends
Net profit
Balance Sheet (RMmil, YE 30 Sep)
Fixed assets
Intangible assets
Other long-term assets
Total non-current assets
Cash & equivalent
Stock
Trade debtors
Other current assets
Total current assets
Trade creditors
Short-term borrowings
Other current liabilities
Total current liabilities
Long-term borrowings
Other long-term liabilities
Total long-term liabilities
Shareholders' funds
Minority interests
BV/share (RM)
Cash Flow (RMmil, YE 30 Sep)
Pretax profit
Depreciation
Net change in working capital
Others
Cash flow from operations
Capital expenditure
Net investments & sale of fixed assets
Others
Cash flow from investing
Debt raised/(repaid)
Equity raised/(repaid)
Dividends paid
Others
Cash flow from financing
Net cash flow
Net cash/(debt) b/f
Forex
Net cash/(debt) c/f

Source: Company, AmInvestment Bank estimates

AmInvestment Bank Bhd

KL Kepong

Published by
AmInvestment Bank Bhd (23742-V)
(A member of the AmBank Group)
15th Floor Bangunan AmBank Group
55 Jalan Raja Chulan
50200 Kuala Lumpur
Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h )
Fax: (03)2078-3162

22 March 2016

The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in
this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or
a solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd may from time to time have a position in or
with the securities mentioned herein. Members of the AmBank Group and their affiliates may provide services to any company and
affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that
we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions f air and
reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for
any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this
date and are subject to change without notice.

Printed by
AmInvestment Bank Bhd (23742-V)
(A member of the AmBank Group)
15th Floor Bangunan AmBank Group
55 Jalan Raja Chulan
50200 Kuala Lumpur
Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h )
Fax: (03)2078-3162

For AmInvestment Bank Bhd

Benny Chew
SR VP Equity Research

AmInvestment Bank Bhd

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