Investment Highlights

• We maintain HOLD on KL Kepong with an unchanged fair value of RM22.20/share, based on an FY23F PE of 18x, which is the 5-year mean of large cap planters. We ascribe a 3-star ESG rating to KLK.

• KLK’s 1QFY23 core net profit was within our forecast but on an annualised basis, 15% below consensus estimates. We expect KLK’s net profit to be weak over the coming quarters due to a decline in manufacturing earnings and soft CPO prices.

• KLK’s core net profit (ex-disposal gains of RM41.9mil) shrank by 33.1% YoY to RM401.2mil in 1QFY23 as palm product prices and manufacturing earnings fell.

• Average CPO price realised slid to RM3,737/tonne in 1QFY23 from RM4,053/tonne in 1QFY22. Average palm kernel price slipped to RM1,951/tonne in 1QFY23 from RM2,864/tonne in 1QFY22. On a positive note, KLK’s FFB production improved by 10.5% YoY in 1QFY23 on the back of a higher number of workers in Malaysia.

• Manufacturing EBIT (oleochemicals and refining) declined by 16.3% YoY to RM277.5mil in 1QFY23. The division’s EBIT margin eased to 5% in 1QFY23 from 6% in 1QFY22. Apart from lower selling prices and demand, we believe that the division recognised smaller gains on derivatives of RM11.6mil in 1QFY23 vs. RM81mil in 1QFY22.

• Comparing 1QFY23 against 4QFY22, KLK’s core net profit dropped by 13.2% to RM401.2mil due to a plunge in plantation earnings and lower share of profits in associates and joint venture. Plantation EBIT dived by 35.1% QoQ to RM335.4mil in 1QFY23, dragged by a higher cost of production and fair value losses of RM70.1mil on derivatives.

• Average CPO price realised was RM3,737/tonne in 1QFY23 compared to RM3,815/tonne in 4QFY22. KLK’s FFB production edged down by 0.6% QoQ in 1QFY23 as heavy rains in certain areas in Kalimantan affected harvesting activities.

• KLK is currently trading at a FY23F PE of 17x, which is higher than its 2-year average of 15x.

Source: AmInvest Research - 23 Feb 2023