Investment Highlights

• We downgrade our recommendation on Kuala Lumpur Kepong (KLK) to SELL from HOLD as its share price has exceeded our fair value of RM23.30/share. We believe that with CPO close to RM6,000/tonne, there is more downside than upside. Our fair value for KLK is based on FY23F of 22.0x. We ascribe a three-star ESG rating to KLK.

• KLK’s 1QFY22 core net profit was above our forecast and consensus estimates. We have raised KLK’s FY22F net profit by 11.5% to account for higher manufacturing earnings. We have not revised KLK’s FY23F net profit.

• KLK’s core net profit climbed by 107.7% to RM599.3mil in 1QFY22 from RM288.5mil in 1QFY21 on the back of strong plantation and manufacturing earnings. Included in KLK’s 1QFY22 reported net profit was a gain (realised and unrealised) on derivatives of RM81.0mil.

• KLK’s plantation EBIT widened by 159.8% to RM597.6mil in 1QFY22 from RM230.0mil in 1QFY21 underpinned by IJM Plantations (IJMP) and robust palm product prices. KLK consolidated three months of IJMP’s earnings in 1QFY22 vs. one month in 4QFY21 and zero in 1QFY21.

• Average CPO price realised surged by 50.3% to RM4,063/tonne in 1QFY22 from RM2,703/tonne in 1QFY21. Average palm kernel price rose to RM2,864/tonne in 1QFY22 from RM1,716/tonne in 1QFY21.

• KLK’s FFB production grew by 30.0% YoY in 1QFY22 mainly due to the acquisition of IJMP. Excluding IJMP, we believe that KLK’s own FFB output would have been flat YoY in 1QFY22. IJMP is estimated to account for almost a third of KLK’s FFB output growth in 1QFY22.

• Manufacturing EBIT improved by 70.4% YoY to RM331.4mil in 1QFY22 due to higher oleochemical and refining profits and an unrealised gain on derivatives of RM44.9mil (1QFY21: unrealised fair value loss of RM109,000). We believe that selling prices of oleocemicals also increased in 1QFY22 as KLK passed on the higher costs of feedstock to customers.

• Refining and palm kernel crushing profits rose by 58.5% YoY to RM79.1mil in 1QFY22. However in terms of margin, EBIT edged down to 6.0% in 1QFY22 from 6.2% in 1QFY21.

• Comparing 1QFY22 against 4QFY21, KLK’s plantationpretax profit increased by 34.1% on the back of strong CPO prices and earnings contribution from IJMP. Average CPO price realised was RM4,063/tonne in 1QFY22 vs. RM3,631/tonne in 4QFY21. KLK’s FFB production expanded by 25.7% QoQ in 1QFY22.

Source: AmInvest Research - 17 Feb 2022