Should I Invest In Kuala Lumpur Kepong Berhad or Batu Kawan Berhad?

Question:

If I am given a choice between Kuala Lumpur Kepong Berhad (KL Kepong) and Batu Kawan Berhad (Batu Kawan), which of the two would I invest today?

Answer:

First and foremost, this is an age-old question often asked by investors who are into plantation stocks. This question arises because Batu Kawan is a substantial shareholder of KL Kepong with 47% shareholdings and earns most of its income from it. In other words, there are two stocks which are profiting from almost, if not all, the same plantation assets.

Second, before picking, I believe we must first understand their similarities. For instance, Tan Sri Dato’ Seri Lee Oi Hian and his brother, Dato’ Lee Hao Hian are major shareholders and key directors of both KL Kepong and Batu Kawan. They remain at the helm of leadership for both companies.

Prior to 2013, Batu Kawan has accounted for KL Kepong’s financial results as an associate company. Starting in 2014, Batu Kawan had adopted a new reporting standard under FRS10 where KL Kepong’s financial results would be accounted for as a subsidiary of Batu Kawan. As such, if I want to decide between the two, I would first study KL Kepong. Soon after, understanding Batu Kawan is as easy as a walk in the park. There is no need to do ‘double-work’.

Thus, here are 5 key things to know about KL Kepong before deciding between the two.

#1: KL Kepong’s Plantation Assets

KL Kepong is an integrated palm oil conglomerate with assets in both upstream and downstream sectors.

Its upstream segment has 223,296 hectares of plantation estates where 95% of these estates are oil palm estates. The balance 5% consists of rubber estates. It operates a total of 25 palm oil mills, 4 refineries and 3 kernel crushing plants.

Its downstream segment runs 14 manufacturing facilities which produce a wide range of oleochemicals such as fatty acids, fatty alcohols, and fatty esters. They have a total production capacity of 3 million metric tonnes (MT) per annum.

#2: KL Kepong’s Production

KL Kepong had achieved steady growth in fresh fruit bunches (FFB) productions for the past 10 years. It has increased from 2.8 million MT in 2008 to 3.9 million MT in 2017. This is due to the management’s efforts in increasing the size of its oil palm estates steadily during the period.

Out of which, KL Kepong had maintained a steady production of crude palm oil (CPO) and palm kernel (PK) for the past 5 years. It had recorded a little short of 1.0 million MT in CPO and a little more of 200,000 MT in PK per year from 2013 to 2017. This is because KL Kepong had reduced its purchase of FFB from other third party suppliers for the processing of CPO and PK during the period.

Source: Annual Reports of KL Kepong

#3: KL Kepong’s Profitability

KL Kepong has proven itself to be a highly profitable company. On average, the conglomerate has made RM 1 billion in shareholders’ earnings per year despite operating in an environment where palm prices are volatile.

Batu Kawan’s profit pattern has mirrored KL Kepong’s profit figures for the last 10 years. It made on average RM 569.6 million a year in shareholders’ earnings.

Source: Annual Reports

#4: KL Kepong’s Balance Sheet Strength

As at 30 June 2018, KL Kepong has reported non-current liabilities totalling RM 3.99 billion. Thus, its gearing ratio is 32.9%. KL Kepong has as much as RM 3.53 billion in net current assets and a current ratio of 2.19.

#5: KL Kepong’s Future Prospects

Recently, KL Kepong has completed two acquisitions. They are as followed:

PT Putra Bongan Jaya (PBJ)

On 3 September 2018, KL Kepong has completed its acquisition of 95% stake in PBJ for RM 296.4 million. It owns the Hak Guna Usaha (HGU) for a total area of 11,602 hectares of land at Kalimantan Timur and Izin Lokasi (IL) for a total area of 4,460 hectares of land which is also located at Kalimantan Timur. The terrain of these lands are flat and are suitable for cultivation of oil palm plantations.

This acquisition would add 16,062 hectares of plantation estates to KL Kepong, 7.5% of its oil palm estate size of 214,825 hectares in 2017.

Elementis Specialties Netherlands B.V. (ESN)

On 28 February 2018, KL Kepong has completed its acquisition of 100% interest in ESN for RM 187.2 million. It includes ESN’s plant & machinery, storage, plant & machineries, working capital, list of customers, intellectual properties and all other tangible assets & inventories at its 16.2 hectares site in Delden, Holland.

As a result, KL Kepong would expand its clientele base and product range for its oleochemical business in the Netherlands.

#6: Valuation for KL Kepong

As I write, KL Kepong is trading at RM 24.90 a share.

In 2017, KL Kepong has made earnings per share (EPS) of RM 0.944. Hence, KL Kepong’s current P/E Ratio is 26.38. On 30 June 2018, KL Kepong has reported net assets a share of RM 10.55. Thus, its current P/B Ratio is 2.36. In 2017, the company had paid out RM 0.50 in dividends per share (DPS). Thus, its dividend yield is 2.01% a year if KL Kepong maintains its DPS at RM 0.50 a year.

Source: Google Finance

#7: Valuation for Batu Kawan

As I write, Batu Kawan is trading at RM 16.88 a share.

In 2017, Batu Kawan has made earnings per share (EPS) of RM 1.452. Hence, its current P/E Ratio is 11.63. As at 30 June 2018, it reported  net assets a share of RM 16.18. Thus, its current P/B Ratio is 1.04. In 2017, Batu Kawan has paid out RM 0.60 in DPS. Thus, its dividend yield is 3.55% a year if Batu Kawan maintains its DPS at RM 0.60 a year.

Source: Google Finance

VIA’s Verdict

Back to the question above:

If I am given a choice between Kuala Lumpur Kepong Bhd (KL Kepong) and Batu Kawan Bhd (Batu Kawan), which of the two would I invest today?

Personally, I choose Batu Kawan due to a more attractive valuation considering that its stock price dropped by 15 – 16% from RM 20 levels at the start of 2018.

What’s your take? Please do share your verdict or thoughts below:

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