Investment Highlights

• We maintain SELL on KL Kepong (KLK) with a higher fair value of RM21.75/share vs. RM19.40/share previously. Our fair value is based on a FY23F PE of 18x and unchanged neutral ESG rating of 3 stars.

• We raise KLK’s FY22E net profit by 11.6% and FY23F net earnings by 12.1% to account for stronger manufacturing revenue as KLK’s 9MFY22 core net profit was 12% above our forecast but within consensus estimates. KLK’s results exceeded our forecast due to higher-than-expected manufacturing turnover. We believe that KLK raised selling prices of its oleochemical products as the cost of raw materials rose.
• In spite of this, we believe that KLK’s manufacturing EBIT could have been higher in 3QFY22. The division recorded provisions and write-off of inventories of RM125.6mil in 3QFY22. Also, palm refineries and kernel crushing operations suffered losses in 3QFY22. We reckon that these were partly due to the ban on CPO exports in Indonesia in May. The amount of the losses was not disclosed.
• As a result, KLK’s manufacturing EBIT fell by 39% QoQ to RM229.1mil in 3QFY22. Manufacturing EBIT margin slid to 3.9% in 3QFY22 from 7.1% in 2QFY22.

• Comparing 9MFY22 against 9MFY21, KLK’s core net profit climbed by 60.8% YoY to RM1.7bil in 9MFY22 on the back of robust palm product prices and manufacturing earnings. Also, KLK consolidated 9 months of IJM Plantations’ (IJMP) earnings in 9MFY22 compared with zero in 9MFY21.

• KLK’s average realised CPO price grew by 44.3% to RM4,398/tonne in 9MFY22 from RM3,048/tonne in 9MFY21. Average palm kernel price surged by 59.3% to RM3,357/tonne in 9MFY22 from RM2,107/tonne in 9MFY21.

• KLK’s FFB production growth was 26.2% YoY in 9MFY22. This was underpinned by the acquisition of IJMP. We believe that IJMP accounted for almost a third of KLK’s FFB output growth in 9MFY22.

• Included in KLK’s plantation EBIT were unrealised losses of RM26.9mil on derivative contracts in 9MFY22. In 3QFY22, KLK recorded unrealised fair value gains of RM86.7mil on derivatives vs. losses of RM84.9mil in 2QFY22.

• KLK’s manufacturing EBIT (mainly palm refining and oleochemicals) rose by 43.2% YoY to RM936.2mil in 9MFY22 on the back of higher selling prices. EBIT margin inched up to 5.6% in 9MFY22 from 5.5% in 9MFY21. We believe that the Malaysian division accounted for most of the group’s oleochemical earnings in 9MFY22.

Source: AmInvest Research - 18 Aug 2022