Should You Invest? 5 Key Points About Kuala Lumpur Kepong (2021)
Disclaimer: I take no responsibility for anyone’s action or decision related to this research. This is only for informational purposes.
Kuala Lumpur Kepong (KLK) is a palm oil company based in Malaysia, and these are the 5 things that you need to know about KLK before investing.
In my previous research on Kuala Lumpur Kepong, I forecasted that KLK should trade at RM21.07 back in 2019, in which it did trade down to that level, but even lower than that to around RM18 to RM19 during the Covid-19 pandemic. It remained around the RM21 to RM22 until November 2020 when it started to go up due to positive news on the world economy and vaccinations.
Right now, with the recovery in the economy, and early signs of KLK being more well-diversified, I have revised KLK’s target price to RM26.33.
KLK’s business is mainly separated into Malaysia and Indonesia, with most of its revenue generated from the world market
To label KLK as a Malaysian company is misleading. Almost 54% of its oil palm plantations are located in Indonesia in 2020, an increase from 52% in 2016. KLK has almost 114,842 hectares in Indonesia, and about 92,099 hectares in Malaysia. For context, Kuala Lumpur has a size of 24,300 hectare which means that KLK owns about 8.8 Kuala Lumpur worth of lands in both countries.
In terms of its customers, KLK derives almost all of its revenue from the world market with over 86% of its revenue coming from foreign countries. This proportion has sharply increased since 2013, where foreign countries consisted of 76, growing to a peak of 87% in 2017. Hence, KLK is highly dependent on the world export market for most of its business.
A good mix of upstream and downstream businesses, but profits margins are a bit low for both.
The downstream manufacturing business (manufacturing) of KLK contributes more to its revenue, at 53% of total revenue. Its upstream business (plantation) contributes about 45% of revenue in 2020, much lower than its peak of 51% in 2017. I view this as positive for KLK’s business development as it is well diversified within the palm oil industry with involvements throughout the supply chain.
However, even with most of its business well diversified, its net profit margins are a bit low for both of its businesses. The planation segment’s profit margin stands at 10% currently, already much higher than 2019’s margin of 6%, but remain lower than its historical average of 14%. The manufacturing side of it has profit margins of only 5% in 2020, pretty much in line with the historical average of 4%. This means even though the downstream manufacturing business consist of a majority of revenue, it actually generates less profit for the company at only 35% of profits. The plantation business on the other hand generates almost 63% of profits for the company.
KLK as a whole has experienced a decline in revenue over the years, with a deterioration in its profit margins also.
KLK’s revenue has declined significantly from its peak of RM21.0bn in 2017 to RM15.6bn currently, representing a 25.7% contraction. Its net profits have also experienced a similar decline from RM1.7bn in 2016 to RM0.8bn in 2020. However, 2020 does mark potentially a turnaround in KLK’s fortunes as it’s profit margins have started to improve from only 3.3% in 2018 to 4.9% in 2020. Unfortunately, this still represent a significant underperformance to its historical profit margins of 7.5%.
The global economic outlook will play a big role in determining KLK’s performance, through selling prices of crude palm oil.
As highlighted just now, KLK depends a lot on the global markets to export its palm oil products with almost 86% of its revenue coming from foreign countries. KLK’s performance is hence dependent on the current economic recovery narrative with the rollout of the vaccine globally. So far, most economic organisations are expecting a rebound in 2021 in terms of growth in the world economy.
In terms of Crude Palm Oil prices, it has declined during the Covid-19 period but have staged a rebound recently as news of vaccine have pushed up expectations of a recovery narrative in 2021.
Kuala Lumpur Kepong is valued at RM26.33, with the gradual recovery of the economy and higher diversification of its businesses
KLK is valued at RM26.33, with an implied price earnings ratio of 29.6 times and current price of RM23.30. This implies KLK is currently undervalued and has the opportunity to go higher. This is pretty much in line with analyst consensus target price of RM26.51.
