Wednesday, August 3, 2011

KLK Company Insight: Planting Target To Normalize In FY12

3 August 2011
Price Target: RM24.91
Share Price: RM21.74


Highlights
Management expects CPO prices to trend down to RM2,800-2,900/tonne in the next few months on the back of the production recovery. Despite KLK’s less sanguine outlook, we are keeping our average CPO price assumption unchanged at RM3,200/tonne in 2011 and RM3,000/tonne in 2012 as:
(1) Average CPO price assumption in 2011 is well supported by high prices in 1H; and
(2) Downside is supported by the wide price gap between soybean oil and CPO.

Its slower-than expected planting progress was due mainly to uncertainties arising from planting moratorium in Indonesia. For the full year, management feels that it could plant only at most 8,000ha.

Planting target beyond FY09/11 will normalize back to 10,000-15,000ha p.a.

Achieved a 90% take-up for the recently launched 342 units of two-storey link houses in Bandar Sri Coalfields and it is targeting for another three new launches over the next few months.

Management expects retail division to remain profitable albeit slightly weaker than FY09/10.

Catalysts
# High CPO price to sustain, albeit lower in 2012;
# Recovery in FFB yield;
# Better-than-expected performance at the property development and retail segment.

Forecasts
Maintained.

Risks - Downside risks
# 1) Sharp plunge in CPO prices;
# 2) Worse-than-expected weather condition that will result in lower-than-expected FFB yield;
# 3) Escalating production cost, in particular, production costs; and
# 4) Labour shortage.

Rating - BUY
Positives:
1) High CPO prices;
2) Exposure in rubber plantations; and
3) Maturing tree profile.

Negatives:
Illiquid trading volume

Valuation
Target Price maintained at RM24.91 based on unchanged 18.5x CY2012 EPS of 134.7 sen. Upgrade from Hold to Buy as upside is now more than 10% since our downgrade on 12 July 2011 (whereby share price has fallen by 4.6% within a short period).



Source: HLIB Research

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