Investment Highlights

• We maintain BUY on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM25.20/share, based on FY25F PE of 18x, which is the 5-year average for big-cap planters. We ascribe a 3-star ESG rating to KLK.

• We have reduced KLK’s FY24F net profit by 12% to account for weaker manufacturing (refining and oleochemicals) earnings. Looking ahead to FY25F, however, we believe that the outlook for olechemical industry would improve as demand recovers.

• Compared to FY23, KLK’s oleochemical division is expected to perform better in FY24F in the absence of restructuring charges in Europe. The restructuring charges amounted to RM70.6mil in FY23.

• The restructuring charges were mainly due to severance expenses and asset impairment as part of a plant in Germany was shut down. The basic oleochemical section of the plant was shut down due to weak demand and high costs of tallow in Europe. The specialty chemicals section of the plant is still operating.

• We estimate KLK’s oleochemical capacity in at 800,000 tonnes to 900,000 tonnes per year after the partial closure of the plant in Germany.

• Operationally, we gather that demand for oleochemical products is still weak. However, we reckon that consumer and industrial companies would start re-stocking as global interest rates plateau or ease in 2H2024.

• As such, we forecast KLK’s manufacturing EBIT to improve by 10% to RM515.3mil in FY24F (excluding FY23 restructuring charge). We assume an EBIT margin of 2.5% in FY24F vs. 2% in FY23.

• For plantation, we impute a FY24F FFB production growth of 6% YoY (vs. 5.2% YoY in FY23 and 7.5% YoY in 2MFY24). KLK’s oil palm estates in Sabah, Sumatra and Kalimantan were not affected by the heavy rains in late- 2023. 50% to 60% of KLK’s FFB production come from Indonesia.

• Ex-mill cost of CPO production is anticipated to decline to RM2,000/tonne in FY24F from RM2,229/tonne in FY23. The drop in the cost of production per tonne in FY24F is driven by lower costs of fertiliser and a higher volume of CPO production.

• KLK is currently trading at a FY25F PE of 16x, which is slightly higher than its 2-year average of 15x. We believe that the premium is justified due to the group’s attractive age profile of oil palm trees.

Source: AmInvest Research - 24 Jan 2024