KL Kepong : From an EV/ha perspective HOLD

STOCK FOCUS OF THE DAY

KL Kepong : From an EV/ha perspective                HOLD

We are revising our recommendation on Kuala Lumpur Kepong (KLK) from BUY to HOLD with a lower fair value of RM25.70/share. We have reduced KLK's FY18F EPS by 4% to account for erosions in manufacturing EBIT margin. In addition, we reckon that there is limited upside to KLK's share price due to the current downward trend in CPO prices. Our fair value for KLK implies a FY18F PE of 25x. In the past seven years, KLK's PE ranged from a low of 14.0x to a high of 29.6x. Average PE was 21.3x. KLK's balance sheet is healthy. Net gearing was comfortable at 24.8% as at end-December 2016. Interest coverage is forecast at 12x in FY18F. Free cash flows are estimated at 76.0 sen per share in FY18F.

In this report, we look at the implied market valuation of KLK's planted landbank. We stripped out the value of the non-plantation assets from KLK's market capitalisation to arrive at the implied valuation of its plantation assets. After that, we divided the number by KLK's planted areas of 205,472ha. We find that the market is currently valuing KLK's planted areas at an estimated RM84,967/ha. This is at the higher end of the range of implied market valuation of the large-cap plantation companies of RM19,000/ha to RM125,000/ha. IOI Corporation has the highest implied market valuation of RM124,851/ha while Felda Global Ventures (FGV) has the lowest implied market valuation of RM19,069/ha. We believe that the implied valuation of KLK's planted landbank is higher than some of its peers as the oil palm trees are younger and some of KLK's plantation land has property development potential. The average age of KLK's oil palm trees is 12 years compared with IOI's 15-16 years old, Sime Darby's 13.1 years old and FGV's 15-16 years old.

STOCKS ON RADAR

Eastern & Oriental, Global Oriental,IQ Group,Chee Wah Corporation

ECONOMIC HIGHLIGHT

Thailand :  Expect current monetary policy to remain

NEWS HIGHLIGHTS

Banking Sector : SME Bank disbursed up to RM70m loans to online businesses

Logistics Sector : Maybulk shares at new high this year, Baltic Dry Index at 27-month high

Infrastructure Sector : RM 55bil East coast rail kicks off