Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a lower fair value of RM21.85/share vs. RM22.22/share previously. Our fair value for KLK is based on its FY23F net profit instead of FY22F as KLK’s effective tax rate is estimated to decline to 25% in FY23F from 30% in FY22F. We ascribe a three-star ESG rating to KLK.

• We have raised KLK’s FY22F net profit by 3.8% to account for the acquisition of IJM Plantations (IJMP). We have also imputed an effective tax rate of 30% for FY22F to reflect the tax on overseas dividend income and prosperity tax in Malaysia.

• KLK’s FY21 core net profit of RM1.8bil (ex-various exceptional items amounting to RM492.8mil in total) were 24.5% above our forecast and 21.2% above consensus estimates. The discrepancies between the actual net profit and our forecast were due to the consolidation of IJM Plantations’ earnings, a low effective tax rate and higher than expected share of net profit in associates (mainly Synthomer).

• KLK will only declare its final gross DPS at a later date. We have forecast KL’s gross DPS for FY21 to be 55 sen (FY20: 50 sen), which implies a yield of 2.7%. The group has paid an interim gross DPS of 20 sen/share.

• Like the other plantation companies, KLK benefited from the surge in palm product prices in FY21. KLK’s plantation division (upstream and palm refining) recorded a larger EBIT of RM1.5bil in FY21 vs. RM732.9mil in FY20.

• Average CPO price realised climbed by 37.0% to RM3,211/tonne in FY21 from RM2,344/tonne in FY20. However, FFB production growth was anaemic at -2.0% in FY21. We believe that this was mainly due to weak FFB yields in Malaysia.

• KLK’s manufacturing division (oleochemicals and gloves) reported a 62.1% jump in EBIT in FY21. This was driven mainly by improved performances in the China and Europe units. EBIT margin was 6.7% in FY21 vs. 5.5% in FY20.

• On a negative note, manufacturing EBIT slid by 28.8% QoQ to RM156.1mil in 4QFY21 dragged by an RM29.1mil impairment on an under-performing specialised oleochemical plant. EBIT margin was 5.2% in 4QFY21 compared with 7.8% in 3QFY21.

• Comparing 4QFY21 against 3QFY21, KLK’s EBITDA rose by about 5.4% on the back of higher CPO production. Average CPO price realised was RM3,631/tonne in 4QFY21 vs. RM3,444/tonne in 3QFY21. FFB production improved by 4.0% QoQ in 4QFY21.

Source: AmInvest Research - 24 Nov 2021