Investment Highlights

• We maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM23.85/share, based on a FY24F PE of 18x, which is the 5-year mean for big cap planters. We ascribe a 3-star ESG rating to KLK.

• Annualised, KLK’s 9MFY23 core net profit (ex-disposal gain of RM41.9mil) was 35% below our full-year forecast and 47% short of consensus. KLK’s results were below expectations as the manufacturing (refining and oleochemicals) division swung into a pre-tax loss of RM73.7mil in 3QFY23. We have reduced KLK’s FY23E net profit by 36% to account for this.

• KLK’s core net profit shrank by 60.3% YoY to RM675.7mil in 9MFY23, dragged by lower palm product prices, weaker manufacturing earnings and losses at 19.7%-associate, Synthomer.

• KLK’s share of net loss in Synthomer was RM160mil in 9MFY23 compared to a profit of RM30.2mil in 9MFY22. Synthomer was affected by impairment losses, amortisation of intangibles, restructuring and site closure costs in 9MFY23.

• Plantation EBIT contracted by 54% YoY to RM749.1mil in 9MFY23. Average realised CPO price slid by 15.9% to RM3,698/tonne in 9MFY23 from RM4,398/tonne in 9MFY22. FFB production growth was 4.8% YoY in 9MFY23.

• KLK’s manufacturing pre-tax profit declined by 59.5% YoY to RM366.7mil in 9MFY23, dragged by lower selling prices and sales volume. EBIT margin slipped to 3.1% in 9MFY23 from 5.6% in 9MFY22.

• On a quarterly basis, manufacturing swung to a pre-tax loss of RM73.7mil in 3QFY23 from a profit of RM186mil in 2QFY23 as operating conditions deteriorated.

• KLK said that the bulk of the manufacturing losses were in Europe. The losses were due to high energy costs and sluggish demand. Currently, KLK is carrying out aggressive restructuring in Europe to contain the losses.

• KLK is currently trading at a fully-valued FY24F PE of 17x vs. its 2-year average of 15x.

Source: AmInvest Research - 25 Aug 2023