Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a higher fair value of RM22.20/share vs. RM21.75/share previously. We tweaked KLK’s FY23F earnings upwards by 2% to account for a stronger FFB output growth of 5% compared with 2.5% originally. Our fair value for KLK is based on a FY23F PE of 18x, at parity to its 5-year mean. We ascribe a 3-star ESG rating to KLK.

• We forecast KLK’s FY23F FFB production to improve by 5% compared with 26.5% in FY22 and 10.5% in 1QFY23. Recall that KLK’s FFB production was boosted by the acquisition of IJM Plantations (now known as Sawit Nusantara) in FY22.

• KLK’s labour shortage is easing with the addition of 1,400 workers mainly from Indonesia in Peninsular Malaysia in 2022. The group is expected to receive another 1,600 foreign workers in 2023F. With 3,300 new workers, labour shortages would not be a major issue for KLK anymore.

• Although the weather was wet at KLK’s estates in Sabah and Indonesia, the group’s harvesting and fruit evacuation processes were not significantly affected.

• We believe that KLK’s ex-mill cost of production would rise to RM2,100/tonne in FY23F from RM2,000/tonne in FY22 due to a higher cost of wages. On a positive note, fertiliser costs are anticipated to decline by 5% to 10% in FY23F.

• We forecast KLK’s manufacturing EBIT (refining and oleochemicals) to fall by 15% in FY23F after record profits in FY22. The lower earnings in FY23F can be attributed to weaker demand and selling prices together with higher cost of energy in Europe.

• Europe is estimated to account for 35% of KLK’s oleochemical production capacity. About half of KLK’s oleochemical production capacity are located in Malaysia while the balance are in Indonesia and China.

• We estimate KLK’s capex to be RM2.4bil in FY23F, of which 40% is earmarked for plantation while another 60% for manufacturing. Bulk of the manufacturing capex is for KLK’s RM800mil palm refinery in East Kalimantan. The palm refinery will have a processing capacity of 1,500 tonnes per day to 2,000 tonnes per day upon completion at the end of 2023F.

• KLK is currently trading at a FY23F PE of 18, near its 5- year mean.

Source: AmInvest Research - 7 Feb 2023