Update on Kuala Lumpur Kepong – 12 July 2017

Update on KLK (SELL, TP: RM21.42) – Increase in TP from RM20.71

Its been a month since the first coverage of KLK here. This will be a monthly-ish update on KLK’s prospects and valuations, and frankly I find it challenging to analyse this company.

On one hand, I am totally going against the analyst recommendations in terms of what position to be in for KLK. Most analyst have KLK as a strong HOLD, and only TA securities have a SELL position. Its average target price from all the analyst stands at RM25.96 with an implied TTM PE of 21.6.

Analyst Recommendation - KLK

In terms of share price performance, KLK returned a monthly return of -0.5% and a YTD return of 3.2%. However, its peers’ YTD performance hasn’t been at all impressive. Its average YTD return is at -6.2% which suggest an overall decline in the palm oil companies. ( exclude FGV and IOI Corp because of abnormal P/E valuations ). KLK currently trades at 20.62 times TTM PE as compared to its peers at 13.5 times.

Competitors - KLK Market

On the other, its Q1 2017 result just came in, and to be honest, it was quite a surprise to me in terms of its revenue holding up. Q1 was supposed to be its weakest quarter judging by its trend last year. Q2 results will be the determinant for make or break for my valuation and calls, and I might be totally wrong in how I was analysing KLK. That aside, its margins did not really improve in Q1 compared to the previous years. Its EBITDA margin has held up at 10.5%, while its net income margin has declined to 5.3% compared to Q4 2016 of 6.6% and FY2016 of 10.2%.

KLK Financials

In comparison to its peers, KLK’s Q1 2017 margins still underperforms with its peers’ average EBITDA margin at 22.9% and net income margin at 12.4%. This is consistent with the previous narrative of KLK’s margins being below its peers and its need to engage in cost optimization measures.

Comps Financials - KLK

In terms of valuation, I am increasing my revenue growth from 4.3% to 4.8% to take into account that KLK has significant downstream businesses and will be able to weather a downturn in the CPO markets with source here. Analysts have been relatively mixed on how to project the CPO market here, with some in the opinion that demand will not be able to soak up the increase in supply coming on by the end of the year. But some have also projected that demand will be sufficient coming from China and India. I am leaning more to the side of demand not being able to soak up the excess supply and have already taken that into consideration in my valuation. My target price has increased to RM21.42 with a recommendation to SELL.

Model - KLK

As a note, I may have to revise my valuation significantly when Q2 results come in, as it seems that I was dead wrong in my projections for its 2017 revenue.



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