Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a higher fair value of RM25.00/share (vs. RM24.80/share). Our fair value for KLK is based on an FY22F PE of 25x compared with FY21F originally.

• Although we have raised KLK’s FY22F net profit by 3.8% to account for a higher average CPO price of RM2,800/tonne vs. RM2,600/tonne previously, we have reduced the PE assumption to 25x from 27x. We believe that ESG (environmental, social and corporate governments) concerns would drag the sector PE for palm oil companies in Malaysia.

• For FY21F, we have raised KLK’s net profit by 6.9% to account for a higher CPO price assumption of RM3,000/tonne vs. RM2,500/tonne originally.

• KLK’s 1QFY21 results were 10% above our expectations and 7% above consensus estimates due to better-thanexpected plantation profits. KLK’s core net profit (excluding forex and disposal gains amounting to RM68.9mil) rose by 72.6% YoY to RM288.5mil in 1QFY21 on the back of higher palm product prices.

• Plantation EBIT (upstream and palm refining) increased to RM279.8mil in 1QFY21 from RM159.8mil in 1QFY20. Average CPO price realised was RM2,703/tonne in 1QFY21 vs. RM2,207/tonne in 1QFY20. Average palm kernel price was RM1,716/tonne in 1QFY21 compared with RM1,247 in 1QFY20. FFB production growth was -0.4% YoY in 1QFY21.

• KLK’s average realised CPO price of RM2,703/tonne in 1QFY21 was lower than the MPOB’s average spot price of RM3,341/tonne. We attribute this to forward sales of CPO carried out at lower prices and weaker CPO price in Indonesia. KLK recognised unrealised losses of RM39.0mil on derivative contracts in the plantation division in 1QFY21.

• In Indonesia, we believe that CPO price was more than RM500/tonne lower than Malaysia in 4Q2020 due to the country’s CPO export tax and levy. KLK has significant exposure to Indonesia as about half of KLK’s FFB production come from Indonesia.

• Manufacturing EBIT (mainly oleochemicals and gloves) improved by 57.8% YoY to RM144.7mil in 1QFY21 underpinned mainly by improved sales volume and unrealised fair value gains of RM14.5mil on derivative contracts (1QFY20: unrealised fair value losses of RM4.4mil). EBIT margin was 6.2% in 1QFY21 vs. 4.8% in 1QFY20.

Source: AmInvest Research - 18 Feb 2021