Is Kuala Lumpur Kepong Berhad The Best Palm Oil Company To Own?
Kuala Lumpur Kepong Berhad (KLK) has seen its share price shot up more than three times since the bottom of the global financial crisis in 2008. Its market capitalisation has grown more than RM16.0 billion over the same period. Yet it is in a commodity business that has not grown particularly strongly over the same period; palm oil.
How did Kuala Lumpur Kepong Berhad do it? And with its rich valuation of 23 times its earnings now, is this mega palm oil company still an attractive investment now?
Here are 7 things you need to know about the company.
Stock Information
TICKER SYMBOL: KLSE:KLK
MARKET CAP: RM 26.2 Billion (Updated 31st Aug 2017)
INDUSTRY: Agriculture
The Business
KLK is a company with a rich history. With more than a century of history, starting as a rubber and palm oil plantation, KLK is now one of the largest palm oil plantation owners in the world. The company has a total land bank of over 270,000 hectares in Malaysia, Indonesia and even Liberia. In 2016, 52% of its land is located in Indonesia with 44% in Malaysia. Most of its palm oil plantation in 2016 are still relatively young, with 42% of them under the age of 9. Oil Palm Trees generally peaked from age 8 to 18 years. This segment also generated most of its operating profit of more than RM818 million.
In the year 2016, KLK was about to produce more than 4.1 million metric tonnes of fresh fruit bunch (FFB), generating more than RM8.3 billion in revenue from its oil palm plantation.
Moreover, it has since grown its downstream business of producing refined palm oils and other oleochemicals, with presences all over the world. Its manufacturing business produced a revenue of more than RM7.7 billion in revenue and RM330 million in operating profit for the segment in 2016.
Lastly, it also has a sizeable property development business which are created to realize many of its prime land located in Peninsular Malaysia.
Kuala Lumpur Kepong is mainly owned by another listed company in Bursa Malaysia, Batu Kawan Bhd. Both Batu Kawan Bhd and Kuala Lumpur Kepong Bhd are being controlled by the Lee Brothers; Tan Sri Dato’ Seri Lee Oi Hian and Dato’ Lee Hau Hian. They are some of the richest people in Malaysia through their stakes in both companies.
Key Opportunities
Strong Balance Sheet
In 2016, management seems quite confident in the recovery of the plantation sector after many years of sub-par performance. Unfortunately, for the most part of FY2017, there has not been a real sign of significant recovery of the sector. For the first nine months of FY2017, KLK has produced a net income of RM 801.0 million, a 37.4% drop compared to the previous financial year.
Fortunately, KLK has one of the strongest balance sheet in the palm oil sector. Its net debt to equity is only at 28% at the end of 30th June 2017. That means for every dollar of equity the company owns, it only has 28 cents in debt, which is a very low figure for a company in an asset-heavy industry.
High Efficiency Track Record
As KLK is in the commodity business, it has little control over the selling prices of its product. So, it can only improve its profit by controlling its cost and production efficiency. Kuala Lumpur Kepong has been quite impressive in this aspect.
Source: Annual Reports
It has averaged about 12% in its ROE over the past 5 years. For a low leveraged commodity company, this showed that Kuala Lumpur Kepong is quite a well-managed and cost efficient company.
Key Risks
No Control Over Its Pricing
No matter how large KLK can grow its business, the fact still remains that it is in a commodity business. Palm oil and other oleochemicals are traded all over the world and their prices are based on the supply and demand of the product.
Even if KLK is one of the larger producers of these commodities, its production is still just a small portion of the global production. This means it is a price-taker of these products. Similar to oil prices, these commodities would face huge downfall during a business cycle and KLK would have little control over its business.
Capital Intensive
Secondly, Kuala Lumpur Kepong is in a capital-intensive business. A typical oil palm trees would need about 7 years of planting to reach maturity. This means that the return on investments of its capital expenditure is very long term in nature. Investors need to be very patient when investing in an oil palm company such as Kuala Lumpur Kepong.
Valuation
KLK is currently trading at 2.5 times its book value and a price to earnings of 23 times. It is offering a dividend yield of 2.05%. All these figures are quite similar to its 5-year long term average of 2.8 times its book value and 23 times its earnings.
Some of its competitors are Wilmar International and Golden Agri-Resources.
Investor Relations
Investor Relation Material:
Annual Report: Click here
Investor Relations Contact:
Address Wisma Taiko,
1, Jalan S.P. Seenivasagam,
30000 Ipoh,
Perak Darul Ridzuan,
Malaysia.
Tel 605-240 8000
Fax 605-240 8115
Map (GPS: 4.5996, 101.0781) Map
Email us
Contact Persons Ms.Lim Poh Poh / Ms.Goh Cheng Suan
Share Registrars Symphony Share Registrars Sdn Bhd
Top Shareholders (31stDec 2016)
Katu Kawan Bhd – 46.57%
Employees Provident Fund Board – 15.29%
FELDA – 3.62%
What Do You Think Of KLK As An Investment? Will You Invest In it? Share Your Views Below
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley’s personal capacity. It does not in any way represent those of his employer and other related entities. Stanley does not own any companies mentioned.
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About The Author
Stanley Lim, CFA
Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.