M&A initiate coverage on KLK

PETALING JAYA: M&A Securities initiatiated its coverage on Kuala Lumpur Kepong Bhd with a 'hold' call and a target price of RM25.77 premised on strong management with good track record, land bank prime age profile, sizeable planted land bank and stable production costs.
In a note yesterday, the research firm expects KLK's revenue and net profit to grow at a three-year compounded annual growth rate (CAGR)of 9% and 14% in FY14 to FY16 underpinned mainly by crude palm oil (CPO) price assumptions of RM2,800 per metric tonne for 2014 and RM3,200 per metric tonne for 2015.
It said this includes steady fresh fruit bunches (FFB) yield performance and resilient OER capability.
In FY03 to FY13, KLK has enjoyed a 10-year revenue CAGR of 10.1% and 10-year net profit CAGR of 9.2%.
The company remained profitable and able to weather the challenging and volatile 2012/2013 period of weaker prices of palm products as well as slowdown in economic growth of importing countries, thanks to its steady increase in plantation land-bank and planted areas coupled with an improvement in yield per mature hectare.
It said rising production cost such as labour and fertiliser cost would certainly increase the cost of production and hence, lowering the profit margin and subsequently earnings.
"As such, we foresee KLK's plantation business particularly in Indonesia may continue to gallop big cost in its new maturing fields. However the higher costs of production will coincide with the higher overall FFB yield (yield in Indonesia are already improving and most of the heavy expenditure has been incurred), hence lowering the costs going forward," it said.
It said the group currently has about 249,000 hectares of plantation land bank, located in Peninsular Malaysia (70,000ha), Sabah (40,000ha) and Indonesia (139,000ha) of which 193,000ha is planted with oil palm followed by rubber (18k hectares).
"We understood that KLK aims to plant 15,000ha of new trees annually with 5,000ha of old and inefficient trees marked for replanting, which we believe could provide consistent support for revenue and net profit growth, with a major catalyst from KLK's Indonesia operations," it added.