Best CPO volume growth profile. KLK has the strongest near-to-mid term volume growth profile with 49% of its planted trees in the ‘immature and young’ category, which will translate to volume growth of at least 8-10% pa by FY10E from 3-4% for IOI Corp. In 2008, KLK overtook IOI in terms of planted land-bank driven by its Indonesian expansion and acquisitions in Peninsula the past 2-3 years. With recent acquisitions and available plantable reserves, oil palm planted land-bank is expected to rise 23% from current 162,000ha to 200,000 ha by 2011.
Restructuring & disposal of non-core assets? The non-plantations businesses (i.e. Yule Catto, Crabtree & Evelyn (C&E), and China oleo-chemical unit) we estimate will suffer from asset impairment and restructuring costs of M$260MM for FY09, which are largely one-off items, and are priced-in we believe. The restructuring of loss-making C&E US, via a bankruptcy protection should help improve long-term profitability from the retailing unit as C&E Asia is profitable. The drag on manufacturing profits is mainly from the non-oleochemical units (i.e. Davos, wood-floor and household glove manufacturing), which KLK is looking to dispose off, while the oleochemical segment is profitable.
Best risk-reward in the sector. Our CPO price forecast is M$2,450/t over 2009-2010 (spot price: M$2,300/t). We have raised our Jun-10 PT from M$13.10 to M$16.00 based on a 20% premium to sum-of-the-parts as we have built in liquidity as well as weather risk premium from El Nino. Our PT implies a FY10E PE of 19x in line with the stock’s peak during the severe El Nino in 1997/98. Key risk to our PT is erosion in the PE premium attached should current El Nino developments reverse. In the event, downside is minimal as the stock should be well supported at our estimated SOTP value of M$13.10, a 4% share price upside.
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