Investment Highlights

• We maintain SELL on KL Kepong (KLK) with a fair value of RM23.70/share. Our fair value for KLK is based on an unchanged FY23F PE of 22x. We ascribe a 3-star ESG rating to KLK.

• KLK’s 1HFY22 core net profit exceeded our forecast by 11.7% but was within consensus estimates. We raise KLK’s FY22F net profit by 13.5% to account for a higher CPO price of RM4,500/tonne vs. RM4,000/tonne previously.

• KLK recorded a higher core net profit of RM1.1bil in 1HFY22 vs. RM680.8mil in 1HFY21. The YoY surge in net profit in 1HFY22 was driven by robust palm product prices and manufacturing earnings. KLK also benefited from the acquisition of IJM Plantations (IJMP). KLK consolidated 6 months of IJMP’s earnings in 1HFY22 vs. none in 1HFY21.

• We believe that KLK’s earnings would have been higher if the group had not recorded unrealised losses of RM113.6mil on derivatives contracts in the plantation division in 1HFY22. The unrealised losses amounted to RM84.9mil in 2QFY22.

• KLK achieved an average CPO price of RM4,207/tonne in 1HFY22 compared with RM2,846/tonne in 1HFY21. Also, average palm kernel price was RM3,352/tonne in 1HFY22 against RM1,976/tonne in 1HFY21.

• KLK’s FFB production growth was strong at 26.8% YoY in 1HFY22 due to contribution from IJMP. We think that IJMP accounted for about a third of KLK’s FFB output in 1HFY22.

• The manufacturing division (mainly oleochemicals and gloves) recorded a larger EBIT of RM707.1mil in 1HFY22 compared with RM409.0mil in 1HFY21. The 72.9% YoY jump in manufacturing EBIT in 1HFY22 was supported by higher selling prices. EBIT margin inched up to 6.5% in 1HFY22 from 5.1% in 1HFY21.

• Included in KLK’s manufacturing EBIT in 1HFY22 were fair value gains on derivatives of RM4.9mil. In contrast, the group recorded fair value losses of RM45.4mil in 1HFY21.

• Comparing 2QFY22 against 1QFY22, KLK’s plantation EBIT declined by 27.2% to RM435.0mil. Average CPO price realised was RM4,378/tonne in 2QFY22 vs. RM4,063/tonne in 1QFY22. Average palm kernel price was RM3,860/tonne in 2QFY22 compared with RM2,864/tonne in 1QFY22. FFB production fell by 12.3% QoQ in 2QFY22.

Source: AmInvest Research - 25 May 2022