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An Investor’s Look at Malaysia’s Oil Palm Giant, Kuala Lumpur Kepong Bhd

Singapore’s stock market is home to a number of oil palm companies. In fact, there are two big oil palm players that are part of Singapore’s market barometer, the Straits Times Index  (SGX: ^STI). One of them happens to be Golden Agri-Resources Ltd (SGX: E5H).

But, Singapore’s stock market is not the only place where oil palm giants are found. Malaysia’s stock market is one such place too. It may not be a surprise, given that Malaysia used to be the world’s leading exporter of palm oil. One Malaysia-listed oil palm outfit is Kuala Lumpur Kepong Bhd (KLSE:2445.KL), which is commonly known as KLK.

The century-old planter

KLK is a company with a rich history. It started out as a plantation company more than 100 years ago and has since diversified its business. That said, oil palm and rubber plantations continue to be the company’s main revenue and profit drivers.

Size don’t matter

At the end of its fiscal year ended 30 September 2015 (FY2015), KLK had close to 270,000 hectares of plantation in Malaysia, Indonesia, and Liberia. In comparison, Golden Agri-Resources has about 480,000 hectares of oil palm plantation in Indonesia – that’s nearly twice the land area that KLK controls.

Despite the size difference in terms of plantation area, KLK’s market value of RM25.6 billion (S$8.5 billion) is much bigger than Golden Agri-Resources’ S$4.99 billion market cap. KLK is in fact one of the most valuable oil palm companies in the world.

Drivers of value

If an investor’s looking at just the assets of the two companies, KLK might appear to be overvalued with its price to tangible book value of 2.6. In contrast, Golden Agri-Resources is only trading at a mere 0.4 times its tangible book value. But, there may be a good reason for this discrepancy in the valuation of the two companies.

KLK is clearly the more profitable company of the two. In FY2015, KLK had recorded revenue of RM13.65 billion (US$3.1 billion) and a profit of RM884 million (US$197 million). Golden Agri-Resources, on the other hand, had made a loss of US$16.7 million in the calendar year 2015 despite bringing in revenue of US$6.51 billion.

The hidden growth potential

Bring a plantation company in Malaysia with a long history, KLK has accumulated a huge land bank in the country – in peninsular Malaysia in particular – that might be suitable for development. In fact, the company has started developing some of its land banks in valuable locations since the 1990’s. As peninsular Malaysia urbanizes, large swathes of KLK’s land in the country can potentially be used for real estate development, thus giving the company a huge but hidden growth potential.

Plantation companies in Indonesia such as Golden Agri-Resources might not have similar growth prospects due to the shorter history of the country’s palm oil industry. Therefore, I think most of the plantation land in Indonesia are still decades or even centuries away from being ready for real estate development.

Foolish Summary

With KLK’s better profitability and higher growth potential, there seems to be a good reason for the company having a higher valuation than Golden Agri-Resources.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.