Kuala Lumpur Kepong: Our top plantations pick

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.

Forward CPO sales 35% above spot - HOLD

KL Kepong: Forward CPO sales 35% above spot - HOLD - Michael
Greenall

KL Kepong (KLK MK) - HOLD
Price 9.95, TP 10.30, Mkt cap $3,048m, Avg t/o $7.4m

Forward CPO sales 35% above spot

* We rate KLK a HOLD: KLK has managed to sell forward 58% of 2009 CPO production at 35% above current spot price.

* CPO prices have stabilised but retail and manufacturing are vulnerable to a slowdown, particularly in the EU and US.

* Strongest balance sheet and capital management capability. TP of MYR10.30 based on 14x FY09E earnings.

2009E: Rec EPS 0.71, P/E 14.1, P/B 1.6, ROE 12.5, Yld 4.1

2010E: Rec EPS 0.90, P/E 11.1, P/B 1.4, ROE 13.8, Yld 4.1

2011E: Rec EPS 0.92, P/E 10.8, P/B 1.3, ROE 12.7, Yld 4.1

KLK - BUY - 22 May 2008

Kuala Lumpur Kepong - 1HFY08 net profit well in-line (Results Note)



Price: RM17.90

Target Price: RM22.00

Recommendation: BUY



· Results in-line. 1HFY08 net profit of RM527.8m was within expectations at 45% of our earnings estimates of RM1,165.0m and 47% of consensus estimate of RM1,112.0m respectively. Revenue, EBIT and pre-tax profit were all in-line with expectations at 46% to 49% of our estimates.

· Huge turnaround in manufacturing segment fortunes. Manufacturing EBIT improved by nearly four times over YoY as Taiko Palm-Oleo (Zhangjiagang) no longer incurred start up expenses and Dr.W.Kolb Holdings, KL Kepong Oleomas and Uniqema all commenced contributions.

· Benefited from higher CPO selling prices. 2QFY08 net profit of RM236.7m was 87% higher YoY primarily due to higher CPO selling prices which according to MPOB, averaged at RM3,466/MT in 2QFY08 or 80% higher YoY.

· 2QFY08 net profit of RM236.7m was 19% lower QoQ due to seasonal post-Christmas retailing losses at Crabtree & Evelyn and allowance for diminution in value of an overseas quoted investment despite increased contribution from the plantation segment which was 38% higher QoQ.

· No revision in earnings estimates. 1HFY08 manufacturing EBIT of RM87.4m pleasantly surprised at 94% of our RM93.0m estimate. We believe strong CPO selling prices and seasonally higher CPO production in 2HFY08 will compensate for the remaining 55% of our earnings estimates of RM1,165.0m.

· Maintain BUY call and RM22.00 target price based on 17x FY09E PER. Dividend yields remain attractive at between 4% and 5%. Current CPO selling prices are circa RM3,500/MT, above our CY08 average CPO selling price forecast of RM3,100/MT. There is additional upside to earnings estimates and target price should CPO selling prices remain high.

· Ladang Perbadanan Fima yet to be imputed into our estimates. As eluded in our company update report dated 5 March 2008, assuming average CPO selling price forecast of RM3,100/MT, Ladang Perbadanan Fima which is currently the subject of an MGO by Kuala Lumpur Kepong will add between RM40.0m and RM50.0m to net profit.





KENANGA INVESTMENT BANK BERHAD (15678-H)

HLG: MRCB - 1Q08 results way below expectations (Results Note)

Kuala Lumpur Kepong Bhd HOLD



Price target RM19.80



Share price at 21 May RM17.90



Investment summary


H108 EPS doubled, but was broadly in-line with HLG/market expectations. We maintain our HOLD rating on KLK due to valuations: EV/ha of RM160,000 and implied terminal CPO price of RM2,600 is a 117% premium to mid-cap names such as Kulim.



We think the appeal of big-cap planters will fall in an environment where CPO prices move sideways and cease to reach new highs: (1) big-cap stocks have been treated as liquid, leveraged CPO proxies; (2) this has created a large 40%+ valuation premium to small/ mid-cap planters. From a macro view, given the tight global supply of edible oil and grain, we expect CPO prices to stay firm over the next 6 months.



Expensive

H108 results were in-line with Street expectations, but are probably priced-in. We still prefer mid-cap plantation names with cheaper valuations. For big cap exposure, we prefer Sime, again on valuations.