Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with a higher fair value of RM23.85/share vs. RM22.90/share previously. We raised KLK’s FY23E net profit by 2% to account for a higher FFB production growth of 8% vs. 5% previously. For FY24F, KLK’s net profit is higher by 4% as we have assumed an increase in FFB of 3% compared to 1% originally.

• Our fair value for KLK is based a FY24F PE of 18x, which is the 5-year average for large-cap planters. We ascribe a 3- star ESG rating to KLK.

• We have assumed a FFB production growth of 8% for KLK in FY23E (8MFY23: 6% YoY). 60% of KLK’s FFB production are expected to come from Indonesia with the balance 40% from Malaysia.

• Although rainfall has eased at KLK’s oil palm estates in Indonesia and Malaysia, the amount of moisture is still sufficient. Also, KLK is no longer facing a shortage of labour in Peninsular Malaysia.

• We think that KLK’s ex-mill cost of production would rise to RM2,200/tonne in FY23E from RM1,952/tonne in FY22. Like the other planters, KLK suffered increases in labour and fertiliser costs in 1HFY23. The group’s ex-mill cost of production climbed to RM2,300/tonne in 1HFY23 from RM1,900/tonne in 1HFY22.

• On a positive note, global fertiliser prices have declined. As such, KLK’s fertiliser costs in 2HFY23 are expected to be 20% to 30% lower than 1HFY23. We understand that the group’s fertiliser application programme in Malaysia is on schedule. However, there was a small delay in Indonesia in 1HFY23 due to logistics issues. KLK is expected to catch up on its fertiliser application in Indonesia in 2HFY23.

• Outlook for the oleochemical division is unexciting. Demand for oleochemical products is weak due to the slowdown in the global economy. A silver lining is that demand for oleochemical products from the personal healthcare industry remains resilient.

• We forecast KLK’s manufacturing (mainly oleochemicals) EBIT to fall by 25% to RM829mil in FY23E. EBIT margin is envisaged to be 3.5% in FY23E vs. 4.8% in FY22. Lower selling prices and sales volume are expected to erode oleochemical EBIT margin in FY23E.

• KLK is currently trading at a FY24F PE of 16x, which is slightly higher than its 2-year average of 15x.

Source: AmInvest Research - 23 Jun 2023