Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM25.00/share. Our fair value for KLK is based on an FY22F PE of 25x. We ascribe a three-star ESG rating to KLK.

• We consider KLK’s annualised 1HFY21 core results (exforex gains and gain on disposal of land amounting to RM262.6mil in total) to be within our forecast but about 5% below consensus estimates.

• We believe that KLK’s manufacturing earnings may soften in 2HFY21. In its announcement to Bursa Malaysia, KLK said that the coming quarters will be challenging for the oleochemical division. We believe that this is due to competition from Indonesia. According to KLK, there is zero duty for oleochemcial products in Indonesia.

• In spite of the surge in CPO prices in 2QFY21, KLK’s plantation EBIT fell by 1.3% QoQ to RM276.3mil due to lower refining profits and an increase in the cost of production per tonne resulting from a drop in FFB output.

• KLK’s average CPO price realised was RM2,997/tonne in 2QFY21 vs. RM2,703/tonne in 1QFY21. The average CPO price realised of RM2,997/tonne in 2QFY21 was 23.1% below the MPOB’s average spot price of RM3,895/tonne. We attribute the price discrepancy to lower CPO prices realised in Indonesia and forward sales of CPO carried out at weaker prices. About half of KLK’s FFB production is from Indonesia.

• Nevertheless comparing 1HFY21 against 1HFY20, KLK’s core net profit surged by 69.4% to RM585.3mil from RM345.6mil in 1HFY20. KLK benefited from strong palm product prices in 1HFY21.

• Apart from plantation, KLK’s manufacturing division (oleochemicals and gloves) performed well in 1HFY21. KLK’s plantation EBIT climbed by 73.3% YoY to RM556.1mil in 1HFY21 while manufacturing EBIT jumped by 76.0% to RM351.9mil.

• KLK realised an average CPO price of RM2,846/tonne in 1HFY21 compared with RM2,373/tonne in 1HFY20. Average palm kernel price realised was RM1,976/tonne in 1HFY21 vs. RM1,391/tonne in 1HFY20.

• KLK’s FFB production edged up by 0.3% YoY in 1HFY21. We have assumed an FFB output growth of 3.5% for KLK in FY21F.

• KLK’s manufacturing EBIT margin rose to 7.1% in 1HFY21 from 5.1% in 1HFY20 on the back of higher sales volume and smaller unrealised fair value losses of RM10.3mil (1HFY20: unrealised fair value losses of RM21.8mil) on derivative contracts.

Source: AmInvest Research - 20 May 2021