Investment Highlights

• We maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM21.75/share, based on a FY23F PE of 18x. We ascribe a 3-star ESG rating to KLK.

• KLK’s FY22 core net profit was within our forecast but 14% below consensus. We believe that KLK’s 4QFY22 results fell short of market expectations due to a 13% QoQ fall in plantation earnings and 35% QoQ decline in manufacturing profits. Average CPO price dropped 21.5% QoQ to RM3,815/tonne in 4QFY22 from RM4,857/tonne in 3QFY22.

• KLK will declare its final gross DPS at a later date. The group has paid an interim gross DPS of 20 sen. We forecast a gross DPS of 100 sen for FY22, which implies a yield of 4.7%.

• Manufacturing division recorded a RM67mil provision for inventories in 4QFY22. The total amount of provisions was RM278mil in FY22. Manufacturing EBIT margin slid to 2.5% in 4QFY22 from 3.9% in 3QFY22.

• On a yearly basis, however, KLK’s core net profit rose by 23% to RM2.2bil in FY22 on the back of higher CPO prices and manufacturing EBIT. KLK’s plantation EBIT climbed by 58% to RM2.1bil in FY22, underpinned by higher palm product prices and production.

• Average realised CPO price rose 32% YoY to RM4,227/tonne in FY22 from RM3,211/tonne in FY21. Average palm kernel price improved to RM2,972/tonne in FY22 from RM2,135/tonne in FY21.

• KLK’s FFB production surged by 27% in FY22 driven by the acquisition of IJM Plantations (IJMP). Excluding IJMP, we believe that KLK’s FFB output would have been flat in FY22.

• Manufacturing EBIT (refining and oleochemicals) increased to RM1.1bil in FY22 from RM915mil in FY21 underpinned by higher demand and selling prices. Manufacturing earnings could have been higher in FY22 if the division had not recorded unrealised fair value losses of RM87mil on derivatives and provisions for inventories of RM278mil.

• KLK is currently trading at a fully valued FY23F PE of 18x vs its 2-year average of 15x.

Source: AmInvest Research - 24 Nov 2022