AmWatch - Plantation Sector : Comparisons between the three big planters NEUTRAL, 10 Apr 2015

SECTOR FOCUS OF THE DAY

Plantation Sector : Comparisons between the three big planters               NEUTRAL

In this report, we compare the operational and efficiency parameters of Felda Global Ventures (FGV), Kuala Lumpur Kepong (KLK) and IOI Corporation.

In terms of PE valuation, KLK is the cheapest while FGV is the most expensive. KLK is currently trading at an FY16F PE of 22.7x compared with IOI’s 23.7x and FGV’s 28.8x. Among the three companies, FGV and IOI have the highest dividend yields of 3.3% and 3.2% respectively while KLK’s yield of 2.0% was the lowest.

KLK is our preferred big-cap exposure to the plantation sector due to its low production cost per tonne, healthy balance sheet and young oil palm trees. Our fair value for KLK is RM23.90/share. IOI’s foreign shareholding is below 18% versus KLK’s 12.4% and FGV’s 6.5%.

IOI has the highest plantation EBIT margin. IOI achieved a plantation EBIT margin of 49.3% in FY14 versus KLK’s 17.9% and FGV’s estimated pre-tax profit margin of 4.9% (excludes LLA changes). KLK’s plantation EBIT margin was affected by refining losses of RM15mil in FY14. IOI’s production cost per tonne is estimated at RM1,351/tonne (EBIT level) in FY14 while KLK’s production cost ex-mill was about RM1,197/tonne. FGV’s production cost ex-mill was roughly RM1,397/tonne in FY14. 

KLK has highest exposure to the upstream segment. Compared with IOI, KLK’s manufacturing profits are smaller as it does not have specialty fats operations. In FY14, IOI’s plantation EBIT was RM1.09bil compared with KLK’s RM1.02bil (excluding refining losses). IOI’s FY14 manufacturing EBIT was RM760.1mil versus KLK’s RM288.1mil.

  KLK and FGV have low net gearing ratios. As at end-December 2014, IOI had the highest net gearing of 83.3%. KLK’s net gearing was 20.0% while FGV’s net gearing was 18.8%. We believe that IOI’s gross borrowings would have declined from RM8.1bil to RM6.8bil after the repayment of the USD476.4mil notes in mid-March 2015. The three companies have almost the same size of plantable reserves.

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