KLK : Upgrade to BUY at RM19 with revised TP of RM21.70

A leap and a bound for KLK

KL Kepong Bhd
(Oct 15, RM19)
Upgrade to buy at RM19 with revised target price of RM21.70 (from RM16.20): KLK over the past week has managed to catch up to the FBM KLCI amid rising crude palm oil (CPO) prices. To note, CPO futures closed at RM2,916 per metric ton (mt) on Oct 14. Year-to-date, the stock has gained 15.2% against FBM KLCI’s gain of 17.6%. We view with current fundamentals there is a chance that KLK could extend gains into CY11.

We expect the Malaysian equity market to be driven by foreign net equity inflows in 4QCY10 and in this respect, KLK is also a laggard. KLK’s foreign shareholding hit a high of about 25% back in mid-2008 before the commodity price crash. The management indicated foreign shareholding is currently at 17.3%, showing there may be upside should foreigners take further interest in the stock.

Key fundamental drivers for CPO prices at the moment are (1) stronger exports driven by new demand from Pakistan and Egypt, as well as demand from US and EU; (2) production is a bit weak as October’s production surge may not be sufficient to take the industry through the upcoming festive season and 1QCY11 cyclical downturn in production; and (3) potential for a supply crunch in the soyabean market despite record crops in North America as supplies are being mopped up by China and also from biodiesel demand. We believe that these three key factors will keep CPO prices buoyant.

We are raising our FY10 CPO average selling price (ASP) to RM2,450/mt from RM2,400/mt previously (EPS +3.4%). To note, for 9MFY10 the group has achieved ASP of RM2,390/mt. For FY11, we raise CPO ASP from RM2,400/mt to RM2,700/mt and similarly for FY12. On the flipside, we are lowering yields slightly as newly matured hectarage dilutes group yields.

FY11 earnings are to be better year-on-year (y-o-y) with the turnaround of Crabtree & Evelyn as well as maturing hectarage from Indonesia. Looking back, when CPO prices reached past RM3,000/mt, KLK managed to trade into the 30 times PER range. KLK currently trades at only 19.6 times on FY11 EPS. Pegging FY11 EPS of 96.9 sen to the +1 standard deviation PER of 22.4 times raises our target price to RM21.70 (RM16.20 previously based on 20 times PER) which implies 14.2% upside from current prices. — ECM Libra Investment Research, Oct 15


This article appeared in The Edge Financial Daily, October 18, 2010.