kl kepong 160322

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PLANTATION

KL KEPONG(KLK MK, KLKK.KL) 22 March 2016

FFB output growth still positive YoY in 5MFY16

Company report BUY

Gan Huey Ling, CFA

[email protected]

03 2036 2305

(Maintained)

Rationale for report: Company Update

Price RM24.18Fair Value RM25.1052-week High/Low RM24.78/RM19.60

Key Changes

Fair value UnchangedEPS Unchanged

YE to Sept FY15 FY16F FY17F FY18F

Revenue (RMmil) 13,650.0 14,059.6 14,841.2 15,377.9Net Profit (RMmil) 869.9 1,009.0 1,142.3 1,240.3EPS (sen) 81.5 94.5 107.0 116.2EPS growth (%) (12.3) 16.0 13.2 8.6Consensus net (RMmil) 1,037.0 1,171.0 1,256.0DPS (sen) 45.0 50.0 55.0 57.0PE (x) 29.7 25.6 22.6 20.8EV/EBITDA (x) 17.9 16.1 14.4 13.3Div yield (%) 1.9 2.1 2.3 2.4ROE (%) 10.0 10.2 11.0 11.3Net gearing (%) 26.0 32.4 34.0 33.4

Stock and Financial Data

Shares Outstanding (million) 1,067.5

Market Cap (RM’mil) 25,812.2Book value (RM/share) 9.06P/BV (x) 2.7ROE (%) 10.0Net Gearing (%) 26.0

Major Shareholders Batu Kawan Bhd (46.6%)

EPF (13.2%)

Free Float (%) 53.4 Avg Daily Value (RMmil) 26.3

Price performance 3mth 6mth 12mth

Absolute (%) +7.5 +8.9 +7.4

Relative (%) +2.2 +4.3 +13.1

Investment Highlights

Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with anunchanged fair value of RM25.10/share, which implies a

FY17F PE of 23.5x. In the past seven years, KLK’s 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 KLK’s FFB outputgrowth 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, KLK’s

FFB production grew by 7.2% YoY.

In spite of the effects of El Nino, it appears that KLK’s FFByields have fared better than its peers. The group’s 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 KLK’s smaller exposure to Sabah. Weestimate that about 16.3% of KLK’s planted areas are inSabah. Indonesia accounts for a significant 53.0% of

planted areas while Peninsular Malaysia accounts for an

additional 27.7%. The balance 3.0% of KLK’s planted areas

is in Liberia.

Apart from the recovery in CPO prices, KLK’s plantationunit 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 underpinnedby a lower feedstock cost resulting from the

implementation of the export levy in July 2015. The

refineries and palm kernel crushing segment in Indonesiarecorded a small loss of RM2.4mil in FY15.

We believe that KLK’s manufacturing unit (mainlyoleochemical 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.

KLK’s foreign shareholding has improved from a low of11.06% as at end-September 2015 to 11.96% as at end-

February 2016. In the past five years, the highest level of

foreign shareholding recorded was 19.2% at end-April2012.

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KL Kepong 22 March 2016

AmInvestment Bank Bhd 2

MAINTAIN BUY WITH UNCHANGED FAIR VALUE

OF RM25.10/SHARE

We are keeping our BUY recommendation on KualaLumpur Kepong Bhd (KLK) with an unchanged fair value ofRM25.10/share, which implies a FY17F PE of 23.5x. In thepast seven years, KLK’s PE ranged from a low of 14.0x toa high of 29.6x. Average PE was 21.7x.

As plantation accounts for 70% of KLK’s EBIT, the group is

expected to benefit from the recovery in CPO prices. Inaddition, compared with other plantation companies, KLK’sFFB production has not fallen as much. We think that thisis because the group has a more balanced geographicalexposure of oil palm estates.

In spite of falling crude oil prices and rising palm prices, wereckon that KLK would be able to sustain the profitability ofits manufacturing division due to the timing of itspurchases of feedstock.

Finally, KLK’s balance sheet is clean as reflected in its net

gearing of 26.1% as at end-December 2016. Only 28.6%of the group’s borrowings are denominated in foreigncurrencies. About 71.4% of KLK’s borrowings are in RM.

KLK’s foreign shareholding has increased from the trough

of 11.06% as at end-September 2015 to 11.96% as at end-February 2016.

UPDATES

FY16F FFB production growth could exceed ourassumption

We have assumed that KLK’s FFB production wouldimprove by 1.8% in FY16F compared with 1.9% in FY15.From October 2015 to February 2016, KLK’s FFB output

rose by 7.2% YoY.

Although there is a possibility that KLK’s FFB production

growth would exceed our assumption for the full year, weare keeping our forecast to be conservative.

In spite of the lagged impact of El Nino, KLK has faredbetter than its peers. In the first two months of 2016F,KLK’s FFB production inched up by 1% YoY vs. declinesof 23.9% YoY for IOI Corporation, 5.2% YoY for GentingPlantations and 3.8% YoY for IJM Plantations.

We attribute this to KLK’s smaller exposure to Sabah,

which suffered from the effects of El Nino more thanPeninsular Malaysia. We estimate that only 16.3% ofKLK’s planted areas are in Sabah.

Peninsular Malaysia accounts for an additional 27.7% ofKLK’s planted areas while another 53.0% is located inIndonesia. The balance 3.0% of KLK’s planted areas is inLiberia (see Chart 1).

In terms of efficiency, we believe that KLK’s production

cost per tonne would increase in FY16F due to higher

minimum wage in Indonesia and fertiliser costs. We thinkthat KLK’s group production cost (ex-mill) would be aboutRM1,300/tonne in FY16F compared with RM1,268/tonne inFY15.

In Malaysia, KLK’s production cost (ex-mill) is estimatedbetween RM1,200/tonne and RM1,300/tonne in FY16Fwhile production cost (ex-mill) in Indonesia is expected torange from RM1,400/tonne to RM1,500/tonne.

We do not expect significant impact from the hike in thelevy of foreign workers in the plantation sector in Malaysia.The increase in the levy from RM590/worker toRM640/worker took effect on 18 March 2016.

As for new plantation developments, we reckon that KLKwould resume its plantings of oil palm in FY16F as the highcarbon stock study on its landbank has been completed.

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

Peninsular Msia,

27.7%

Sabah, 16.3%

Indonesia, 53.0%

Liberia, 3.0%

Source: Company, AmInvestment Bank Bhd

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New plantings of oil palm are estimated at 3,000ha inFY16F vs. zero in FY15.

Improved refining profits to support plantationearnings in FY16F

Apart from the uptick in CPO prices, we believe that KLK’s

plantation profits would also improve in FY16F on the back

of a turnaround in the earnings of the refineries inIndonesia and a boost in palm kernel crushing profits. InFY15, the refineries and palm kernel segment recorded asmall loss of RM2.4mil.

KLK’s refineries in Indonesia have swung into the blackunderpinned by lower feedstock cost resulting from theimplementation of the export levy in July 2015. Weestimate KLK’s refining capacity at 990,000 tonnesannually in Indonesia. Palm kernel crushing capacity isabout 200,000 tonnes per year.

Going forward, although the cost advantage of palm

refineries in Indonesia is expected to be eroded by theimposition of export tax in April 2016 in Malaysia, wereckon that the Indonesian refiners would still be able tomaintain their competitiveness.

We estimate the difference in the cost of CPO betweenMalaysia and Indonesia at RM160/tonne or US$39/tonneafter 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 KLK’s manufacturing EBIT (mainlyoleochemical operations) to inch up by 2% in FY16F. We

have assumed that the unit’s EBIT margin would remainunchanged at 3.5% in FY16F.

In spite of plunging crude oil prices, which would affect theselling prices of oleochemicals and rising palm prices,which are expected to increase cost of production, webelieve that the manufacturing division would be able tosustain its profitability. This is due to the timing of thepurchases of feedstock.

A large portion of KLK’s oleochemical earnings in FY16F isexpected 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 thatoleochemical earnings in China may not be exciting inFY16F due to the slowdown in the country’s economy.

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TABLE 1 : FINANCIAL DATA

Income Statement (RMmil, YE 30 Sep) 2014 2015 2016F 2017F 2018F

Revenue 11,130.0 13,650.0 14,059.6 14,841.2 15,377.9EBITDA 1,701.1 1,585.9 1,807.5 2,045.0 2,229.3Depreciation (335.8) (387.7) (405.0) (454.4) (503.8)Operating income (EBIT) 1,365.3 1,198.2 1,402.5 1,590.6 1,725.5Other income & associates 5.9 (2.4) (2.6) (2.9) (3.2)Net interest (51.3) (61.2) (96.6) (112.3) (120.4)Exceptional items (2.2) - - - -Pretax profit 1,317.7 1,134.6 1,303.3 1,475.4 1,602.0Taxation (285.0) (250.6) (273.7) (309.8) (336.4)Minorities/pref dividends (41.0) (14.1) (20.6) (23.3) (25.3)Net profit 991.7 869.9 1,009.0 1,142.3 1,240.3

Balance Sheet (RMmil, YE 30 Sep) 2014 2015 2016F 2017F 2018F

Fixed assets 4,220.2 4,817.7 5,312.7 5,758.3 6,154.5Intangible assets 430.2 492.9 492.9 492.9 492.9Other long-term assets 3,726.9 5,156.7 5,363.5 5,590.4 5,839.6Total non-current assets 8,377.3 10,467.4 11,169.1 11,841.7 12,487.1Cash & equivalent 1,295.8 2,083.2 1,632.0 1,634.8 1,866.4Stock 1,441.4 1,613.8 2,349.7 2,454.1 2,521.7

Trade debtors 1,002.1 1,711.4 1,733.4 1,829.7 1,895.9Other current assets 771.0 1,383.9 1,103.4 1,171.3 1,225.4Total current assets 4,510.3 6,792.3 6,818.5 7,089.9 7,509.4Trade creditors 393.3 713.7 503.5 490.8 504.3Short-term borrowings 1,094.2 1,912.8 2,104.1 2,314.5 2,546.0Other current liabilities 761.3 1,096.1 1,224.4 1,261.7 1,285.8Total current liabilities 2,248.8 3,722.6 3,832.0 4,067.0 4,336.1Long-term borrowings 1,816.2 2,681.2 2,815.3 2,956.0 3,103.8Other long-term liabilities 639.4 727.7 716.4 706.2 697.0Total long-term liabilities 2,455.6 3,408.9 3,531.6 3,662.2 3,800.9Shareholders' funds 7,751.7 9,666.4 10,141.6 10,696.8 11,328.6Minority interests 431.5 461.7 482.3 505.6 530.9BV/share (RM) 7.26 9.06 9.50 10.02 10.61

Cash Flow (RMmil, YE 30 Sep) 2014 2015 2016F 2017F 2018F

Pretax profit 1,317.7 1,134.6 1,303.3 1,475.4 1,602.0Depreciation 335.8 387.7 405.0 454.4 503.8Net change in working capital (937.4) (1,433.5) (839.0) (560.0) (492.8)Others 22.8 377.5 27.3 0.0 0.0Cash flow from operations 739.0 466.3 896.6 1,369.8 1,613.0Capital expenditure (754.5) (730.0) (400.0) (400.0) (400.0)Net investments & sale of fixed assets (66.3) 82.0 (178.2) (196.0) (215.6)Others (341.4) (89.8) (522.6) (524.9) (527.4)Cash flow from investing (1,162.2) (737.8) (1,100.8) (1,120.9) (1,143.0)Debt raised/(repaid) 550.4 1,536.8 314.0 341.0 370.1Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0Dividends paid (614.8) (635.6) (533.8) (587.1) (608.5)Others 20.4 (22.3) 0.0 0.0 0.0Cash flow from financing (44.0) 878.9 (219.7) (246.1) (238.4)Net cash flow (467.2) 607.4 (424.0) 2.8 231.7Net cash/(debt) b/f 1,753.8 1,264.8 2,055.9 1,632.0 1,634.8

Forex (21.8) 183.7 0.0 0.0 0.0Net cash/(debt) c/f 1,264.8 2,055.9 1,632.0 1,634.8 1,866.4

Key Ratios (YE 30 Sep) 2014 2015 2016F 2017F 2018F

Revenue growth (%) 21.7 22.6 3.0 5.6 3.6EBITDA growth (%) 11.6 -6.8 14.0 13.1 9.0Pretax margins (%) 11.8 8.3 9.3 9.9 10.4Net profit margins (%) 8.9 6.4 7.2 7.7 8.1Interest cover (x) 33.2 25.9 18.7 18.2 18.5Effective tax rate (%) 21.6 22.1 21.0 21.0 21.0Net dividend payout (%) 59.1 55.2 52.9 51.4 49.1Trade debtors turnover (days) 33 46 45 45 45Stock turnover (days) 56 49 70 70 70Trade creditors turnover (days) 15 22 15 14 14

Source: Company, AmInvestment Bank estimates

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Published by

AmInvestment Bank Bhd (23742-V) (A member of the AmBank Group)

1 5 t h F l o o r B a n g u n a n A m B a n k G r o u p55 Jalan Raja Chulan50200 Kuala LumpurTel : ( 03)2070-24 44 ( r esearch)F a x : ( 0 3 ) 2 0 7 8 - 3 1 6 2

Printed by

AmInvestment Bank Bhd (23742-V)

(A member of the AmBank Group)1 5 t h F l o o r B a n g u n a n A m B a n k G r o u p55 Jalan Raja Chulan50200 Kuala LumpurTel : ( 03)2070-24 44 ( r esearch)F a x : ( 0 3 ) 2 0 7 8 - 3 1 6 2

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

For AmInvestment Bank Bhd

Benny Chew

SR VP Equity Research

kl kepong 160322

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