Investment Highlights

• We maintain HOLD on KL Kepong with a higher fair value of RM22.90/share vs. RM22.20/share previously. Our fair value of RM22.90/share is now based on a rolled-forward FY24F PE of 18x, in line with the 5-year mean of large-cap planters. We ascribe a 3-star ESG rating to KLK.

• KLK’s annualised 1HFY23 core net profit was 14% below our forecast and 33% below consensus estimates. The group’s results fell short of our expectations as 26%- owned Synthomer PLC recorded a loss. We have reduced KLK’s FY23E net profit by 14% to account for this.

• KLK’s share of net loss in Synthomer was RM161.1mil in 1HFY23 vs. a positive RM28.6mil in 1HFY22. Synthomer was hit by impairment losses, amortisation of intangibles, restructuring and site closure costs in 2QFY23.

• KLK’s core net profit (ex-disposal gain of RM41.9mil) fell by 48.3% YoY to RM592mil in 1HFY23 due to lower palm product prices, a decline in manufacturing earnings and losses at Synthomer.

• Plantation EBIT shrank by 39.6% YoY to RM623.9mil in 1HFY23 from RM1bil in 1HFY22. Average CPO price realised was RM3,732/tonne in 1HFY23, 11.3% weaker than RM4,207/tonne achieved in 1HFY22. Average palm kernel price slid to RM1,910/tonne in 1HFY23 from RM3,352/tonne in 1HFY22.

• On a positive note, KLK’s FFB production growth was healthy at 8.9% YoY in 1HFY23. We attribute the robust FFB output in 1HFY23 to a higher number of estate workers and dissipating effects of 2019 drought.

• KLK’s manufacturing EBIT (oleochemicals and refining) dived by 29% YoY to RM501.9mil in 1HFY23, dragged by declines in selling prices and demand for oleochemical products. EBIT margin eased to 4.7% in 1HFY23 from 6.5% in 1HFY22.

• Comparing 2QFY23 against 1QFY23, KLK’s core net profit fell by 56.9% to RM190.8mil due to a 15% drop in FFB production and 19.1% contraction in manufacturing earnings. Average realised CPO price edged down to RM3,727/tonne in 2QFY23 from RM3,737/tonne in 1QFY23. Average palm kernel price was RM1,864/tonne in 2QFY23, 4.5% weaker than the RM1,951/tonne in 1QFY23.

• KLK is currently trading at a fair FY24F PE of 17x, which is slightly higher than the 5-year mean of 18x for large planters, and offers a decent dividend yield of 4%.

Source: AmInvest Research - 25 May 2023