25 July 2012

Summary of Analyst Report: Kuala Lumpur Kepong's (KLK) target price RM 21.62, Reduce - Affin Investment Bank Research

Kuala Lumpur Kepong's (KLK) realised crude palm oil (CPO) selling prices have been consistently lower than the Malaysian Palm Oil Board (MPOB) averages and those of its peers due to the dilutive impact of the Indonesian export duties.

KLK's three refineries coming on stream in Indonesia this and next year will allow the group to recoup the Indonesian CPO price “discount” of about RM500 per tonne.

However, the latest move by the Indian government to effectively raise import duty on refined palm olein imports by about RM134 per tonne is expected to cut refining margins, thereby lengthening the payback period for the three refineries.

Margins from existing Malaysian refining operations may also be affected but there will be offset from higher CPO prices as Indian refiners import more.

Meanwhile, the total immature areas of 34,495 ha imply that total mature areas adjusted for replanting of older palms could potentially increase by over 20% in the next three years.

The group also has a plantable reserve of 22,048 ha and will be converting 5,000 ha of aging and low-yielding rubber areas into oil palm plantations in the next four years.

More areas in Indonesia coming to maturity and reaching prime age as well as yield improvements are expected to contribute to fresh fruit bunches (FFB) production growth of 6%-10% in financial years 2012 to 2014.

Its capital expenditure in financial year 2012 is budgeted at RM1.1bil (more than doubled the RM477mil in financial year 2011 and RM366mil in financial year 2010) for new planting as well as new and expansion of palm oil mills and oleochemicals plants.

Funding is not an issue, given the profitability of its operations as well as the group's cash reserve of over RM1.4bil and low net gearing of less than 0.1 times as at end-March.

It should be noted that corn and soybean prices have recently hit record highs following reports of a worsening draught in the US Midwest.

CPO futures, however, have yet to show signs of a bullish rally as supply remains ample while production is still on an uptrend.

We continue to monitor the outlook as high prices of corn and soybeans could turn down quickly if weather patterns in the US Midwest and South-East Asia improve.

Overall, while we continue to like KLK's good management and long-term growth prospects, at the current price and implied 2013 price-earnings of 17.7 times, our “reduce” call is maintained.

Source: www.thestar.com.my


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