PP 7767/09/2010(025354)

19 August 2010
Malaysia Corporate Highlights
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
19 August 2010
MARKET DATELINE

Kuala Lumpur Kepong Share Price

Fair Value
:
:
RM16.90
RM20.75
Impressive Turnaround For Retail Division Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (KLK; Code: 2445) Bloomberg: KLK MK

Net Net
FYE Turnover Profit ^ EPS ^ Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Sep (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 6,658.3 753.8 70.6 (33.5) 23.9 - 3.2 17.9 10.9 8.1 2.4
2010f 7,646.7 934.7 87.6 24.0 19.3 91.0 3.1 15.5 15.1 8.0 2.7
2011f 9,016.7 1,328.3 124.4 42.1 13.6 103.0 2.8 12.9 19.8 7.2 3.8
2012f 9,285.8 1,402.2 131.4 5.6 12.9 115.0 2.8 11.6 20.9 5.5 4.1
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC/ FBM KLCI Component Stock (2.9% wt)
^ normalised

♦ In line. KLK’s 9MFY09/10 core net profit was within expectations, RHBRI Vs. Consensus
comprising between 69-71% of our and consensus full year FY10 core net Above
profit forecasts. KLK recorded approximately RM34.4m in EI gains in In Line
9MFY10 from writeback of provision in diminution in value for Yule Catto Below
(3QFY10: RM1.9m). We expect stronger numbers in the final quarter,
Issued Capital (m shares) 1,065.0
given the higher CPO prices currently and as FFB production gears up
Market Cap (RMm) 18,040.8
towards peak harvest season. Daily Trading Vol (m shs) 1.6
52wk Price Range (RM) 11.30-17.26
♦ Core net profit rose 36% yoy on the back of a 10% rise in turnover in
Major Shareholders: (%)
9MFY10. All divisions except the property division saw improvements in Batu Kawan Bhd 46.6
revenue, while the relatively larger rise in net profit was due to improved EPF 7.6
profit margins for the plantations, manufacturing and retail divisions,
offset slightly by lower margins for the property division. Average CPO
FYE Sep FY10 FY11 FY12
price achieved rose significantly (+2.1% qoq and 10% yoy) in 3QFY10 to
EPS chg (%) - - -
RM2,562/tonne, which is slightly higher than average spot price of
Var to Cons (%) (3.8) 20.8 14.2
RM2,529/tonne for the quarter, while FFB production also improved by
8.7% qoq and 6.9% yoy. The retailing division recorded a notable PE Band Chart
turnaround to profitability in 3QFY10, the first time in many years, as a
PER = 25x
result of lower expenses after the closure of some of its US stores. PER = 20x
PER = 15x
♦ Risks. Main risks include: (1) a convincing reversal in crude oil price PER = 10x

trend resulting in reversal of CPO and other vegetable oils price trend; (2)
weather abnormalities resulting in an over or under supply of vegetable
oils; (3) revision in global biofuel mandates and trans-fat policies; and (4)
a slower-than-expected global economic recovery, resulting in lower-
than-expected demand for vegetable oils. Relative Performance To FBM KLCI

♦ Forecasts. Unchanged. We highlight that our forecasts have included the

potential impact of a further restructuring loss for KLK’s retail division of Kuala Lumpur Kepong
approximately RM16.5m in FY10 for C&E US, although this may be
unlikely given the operational improvement seen so far.

♦ Investment case. Despite our unchanged forecasts, we revise our SOP-

FBM KLCI

based fair value for KLK up slightly to RM20.75 (from RM20.70), after
taking into account the latest net debt figure. We continue to like KLK for
its inexpensive valuations (as it remains the cheapest amongst the big-
cap plantation stocks currently) and for its strong management with a
good track record. Further catalysts could come from better-than- Hoe Lee Leng
(603) 92802184
expected FFB production growth as well as sustainable return to
hoe.lee.leng@rhb.com.my
profitability of the retail division. We maintain our Outperform rating.

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Table 2 : KLK Quarterly Results

FYE Sep QoQ YoY YoY

3Q09 2Q10 3Q10 9MFY09 9MFY10 Comments
(RMm) (%) (%) (%)

Plant. 813.2 1,060.3 927.7 (13) 14 2,597.9 2,854.7 10 Higher CPO price (+5.4% yoy) of
RM2,390/tonne and higher FFB
production (+13.3 yoy)

Manuf. 632.4 781.9 825.4 6 31 1,887.0 2,255.6 20 Higher selling prices and sales
volume

Retail 118.8 106.9 113.4 6 (5) 483.0 486.0 1 Improvement in same store sales
after closure of non-performing
stores

Property 0.6 4.4 3.8 (14) 506 24.5 19.0 (23) Lower progress billings on
existing projects and no new
property launches

Others 17.9 19.9 18.4 (8) 3 66.6 68.6 3

Elim. (45.5) (72.1) (61.7) (14) 36 (200.2) (207.8) 4

Turnover 1,537.3 1,901.3 1,827.0 (4) 19 4,858.7 5,476.0 13 From all divisions except property

Plant. 184.6 270.6 262.2 (3) 42 663.4 765.8 15 Higher margins of 26.8% (vs
25.5% in 9MFY09) from improved
operational efficiencies

Manuf. (16.9) 37.7 51.4 36 (404) (17.0) 111.9 759 EBIT margin rose to 5.0% in
9MFY10 (from 2.2% in 9MFY09 -
ex-EI loss of RM33.5m for write-
down of inventories for China’s
oleochemical operations and
RM25.3m for impairment of
Davos), due to higher selling
prices

Retail (27.8) (19.8) 4.7 (124) (117) (36.7) 37.4 202 Improvement in EBIT margin to
7.7% (from -7.6% in 9MFY09),
due to lower operating expenses
after restructuring exercise for
C&E US

Property (0.6) 1.1 0.3 (73) (151) 5.8 3.8 (34) Lower EBIT margins of 20.1%
(from 23.6% in 9MFY09), due to
change in product mix

Others 111.8 10.8 4.7 (57) (96) (43.6) 46.0 205 Includes EI

EBIT 251.2 300.3 323.2 8 29 571.9 964.9 69 From all divisions

Margin (%) 16.3 15.8 17.7 11.8 17.6

Int. exp. (16.7) (14.1) (14.1) (0) (15) (52.5) (43.1) (18) Due to lower borowings

Assoc. 4.8 13.3 11.5 (13) 138 25.2 27.8 10

EI 68.2 13.2 1.9 (86) (97) (121.1) 34.4 n.m. EI gain in 9MFY10 is writeback of
provision for diminution in value
for Yule Catto, while EI loss in
9MFY09 is for: RM47.8m
YuleCatto writedown, RM23.5m
realised forex loss on repayment
of interco loans, RM25.3m
impairment for Davos, and
RM24.5m provision for diminution
in value of other investments

PBT 239.3 299.5 320.6 7 34 544.5 949.5 74 Filtered down from EBIT, EI and
lower interest costs

Taxation (40.0) (71.2) (64.3) (10) 61 (159.1) (209.4) 32

Tax rate (%) 16.7 23.8 20.1 29.2 22.1 EI losses and gains not tax-
deductible and not taxable

MI (9.1) (12.3) (12.7) 4 41 (16.7) (38.8) 133

Net profit 190.2 215.9 243.5 13 28 368.8 701.3 90 Filtered down from PBT and lower
effective tax rate

Core net 122.0 202.7 241.6 19 98 489.9 666.9 36 Ex-EI

profit

EPS (sen) 17.9 20.3 22.9 13 28 34.6 65.9 90

Source: Company, RHBRI estimates

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Table 3. Fair Value Calculation

Valuation basis FV (RMm)

Plantation earnings 16x CY11 earnings 20,697.7

Manufacturing earnings 10.5x CY11 earnings 1,513.9

Property earnings 12x CY11 earnings 236.3

Retail earnings Zero asset value less potential asset write-downs (15.1)

Add/(less): Net cash/(debt) (End-3QFY10) (266.5)

SOP (RMm) 22,166.2

SOP/share (RM) 20.76

Shares (m) 1,067.5

Source: RHBRI estimates

Table 4. Earnings Forecasts Table 5. Forecast Assumptions

FYE Sep (RMm) FY09a FY10F FY11F FY12F FYE Sep FY10F FY11F FY12F

Turnover 6,658.3 7,646.7 9,016.7 9,285.8 FFB Processed (‘000 t) 4,129 4,469 4,688
Turnover growth (%) (15.2) 14.8 17.9 3.0 CPO Production (‘000 t) 888 961 1,008
PKO Production (‘000 t) 202 219 230
Operating Profit 921.6 1,309.9 1,869.6 1,964.3 Average CPO price (RM/t) 2,500 2,650 2,500
Op Profit margin (%) 13.8 17.1 20.7 21.2 Average PKO price (RM/t) 2,700 3,300 3,000

EBITDA 1,210.0 1,555.9 2,123.1 2,241.7

EBITDA margin (%) 18.2 20.3 23.5 24.1

Depreciation (205.5) (229.5) (253.4) (277.4)

Net Interest (68.8) (65.8) (59.5) (51.7)
Associates 34.6 37.6 34.7 34.9
EI (82.9) (16.5) 0.0 0.0

Pretax Profit 887.4 1,281.7 1,844.9 1,947.5

Tax (244.8) (324.5) (461.2) (486.9)
PAT 642.6 957.1 1,383.6 1,460.6
Minorities (30.1) (38.9) (55.3) (58.4)
Net Profit 612.5 918.2 1,328.3 1,402.2
Core Net Profit 753.8 934.7 1,328.3 1,402.2
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

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Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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