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Thursday, March 12, 2009

KL Kepong - Buy


Investment Highlights



Price RM10.00
Fair Value RM11.90
52-week High/Low RM6.75-RM18.20

Maintaining BUY on Kuala Lumpur Kepong Bhd (KLK) with unchanged fair value of RM11.90/share mainly based on CY09F’s PE of 15x on plantation earnings. After fine-tun-ing our earnings forecast, KLK’s FY09F and FY10F net profits were lower by 2% each respectively.


We came away from a company visit to KLK learning that the group has a positive outlook on price of CPO (crude palm oil). In the coming few months, KLK believes that CPO prices would hover between RM1,700/tonne to RM1,899/tonne. The group reckons that CPO prices would rise further and sustain at RM2,000/tonne in the second half of the year.


Improvements in the price of CPO in 2H2009 are expected to be underpinned by the “normalisation” of FFB (fresh fruit bunches) production in the first half of this year and a recovery in demand from China.



After a bumper harvest last year, Malaysia’s production of CPO is expected to return to its normal levels of single- digit growth. But we understand that if FFB production were to not normalise, then there would be a strong likeli- hood that tree stress would set in by the end of this year or early next year.



In terms of demand, China’s imports of palm oil from Malaysia is expected to recover in 2H2009 due to the sea- sonal and festive period. We also gather that there has been some genuine switching between soybean oil and crude palm oil, which had led to the narrowing of price discount between the two commodities recently.



The switching were carried out mainly by importers from India, who capitalised not only on CPO’s cheaper pricing but also on the import tax differential between CPO and soybean oil.

On the whole, we believe that KLK’s healthy balance sheet (FY09F net gearing: 10%) would help the group to ride out the current economic uncertainties, capitalise on any ac- quisitive opportunities and benefit from a potential improvement in CPO prices in 2H2009. Operating cashflows are forecast at RM900mil in FY09F, which should be sufficient to finance an annual capex of RM400mil.


We estimate gross DPS at 50 sen for FY09F (FY08: 70 sen). This implies a net dividend payout of 51%, in line with the payout of more than 50% each over the past four financial years.


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