RHB Research says the plantation company’s foreign shareholding is currently at 14.6%, the lowest in last 2 years

by SULHI KHALID/ pic by BLOOMBERG

KUALA Lumpur Kepong Bhd’s (KLK) share price post share placement at a discount and subsequent profit taking provides a good buying opportunity now, according to RHB Research Institute Sdn Bhd.

The research outfit noted that the plantation company’s foreign shareholding is currently at 14.6%, the lowest in last two years.

“The current-price implies 27 times price-earnings (PE) ratio, at an attractive discount to its peers’ 30-35 times,” RHB stated in a research note on Sunday.

KLK believes the peak production months for oil palm could be over for the year, given the dry weather experienced at its Riau and Kalimantan Tengah estates in Indonesia, which saw very little rain in the month of July and August.

“For financial year 2019 (FY19 ended September), KLK recorded a 5.3% year-on-year (YoY) rise in fresh fruit bunch (FFB) output, in line with its 3%-5% projection and slightly above our 4% forecast,” RHB noted.

For FY20, KLK expects its FFB growth to remain around 4%-5%, with the bulk of the growth coming from its Indonesian estates.

Its Malaysian estates are likely to record flattish to negative FFB growth in FY20, due to replanting activities and older age profiles. RHB has targeted a 4.2% FFB growth forecast for FY20, but highlighted KLK’s unit costs are relatively still amongst the lowest of its peers.

RHB stated that KLK estimates its average unit costs at RM1,450-RM1,500 per tonne, excluding palm kernel credit for FY19. KLK has already completed its manuring programme for FY19, but has not yet tendered for its FY20 fertiliser requirements.

“Costs should remain relatively stable going forward, barring any significant increase in fertiliser prices.

“KLK remains one of the most efficient industry players in terms of operating costs, on par with those of IOI Corp Bhd and United Plantations Bhd,” it said.

RHB added that the Ipoh-based group is taking advantage of low interest rate environment by issuing a RM2 billion sukuk at the end of September.

“While KLK does not have any specific use for these bonds at the moment, the amount may be useful should any mergers and acquisition (M&A) opportunities come by,” it said. RHB said KLK is still on the lookout for M&A opportunities in the form of plantation landbank in Indonesia as well as downstream assets in the specialty chemicals space.

However, the pricing gap between buyers and sellers remains large, at US$2,000 (RM8,380)-US$3,000/ha, despite the lower crude palm oil price environment, the research house added.

RHB has maintained a ‘Buy’ call for KLK with a target price of RM26.25, based on unchanged 30 times target PE for its plantation unit, 15 times for its manufacturing unit and a 60% discount applied to the revalued net asset value of its property landbank.

KLK share price closed 12 sen higher yesterday at RM21.62, valuing the plantation company at RM23 billion.

The group owns oil palm and rubber plantations in South-East Asia and manufactures fatty acids and alcohols, oleochemicals, soaps, rubber gloves, and other specialty chemicals.