Investment Highlights

• We maintain BUY on KL 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 neutral 3-star ESG rating to KLK.

• Although KLK’s 1HFY24 results were poor, we are keeping our BUY recommendation. We believe that FY25F would be a better year for KLK due to a recovery in oleochemical earnings.

• KLK’s annualised 1HFY24 core net profit of RM320.6mil (ex-disposal gains of RM23.4mil) was 27% below our forecast and 28% short of consensus. KLK’s results were disappointing due to losses in Synthomer, a high effective tax rate of 30.7% and lower-than-estimated manufacturing EBIT margin. We have reduced KLK’s FY24E net profit by 27% to account for these.

• 27%-owned Synthomer continued to be in the red in 1HFY24 due to weak operating conditions, restructuring costs and increased amortisation expenses. KLK’s share of net loss in Synthomer was RM87.2mil in 1HFY24 vs. RM169.7mil in 1HFY23.

• On a positive note, KLK’s plantation EBIT rose by 16% YoY to RM717.6mil in 1HFY24 on the back of a lower cost of production per tonne and higher FFB production. Average realised CPO price slid by 5.1% to RM3,543/tonne in 1HFY24 from RM3,732/tonne in 1HFY23. KLK’s FFB production rose by 7.2% YoY in 1HFY24.

• Manufacturing EBIT (refining and oleochemicals) dived 73% YoY to RM140.2mil in 1HFY24. EBIT margin shrank to 1.5% in 1HFY24 from 4.7% in 1HFY23. KLK said that its oleochemical division in Europe was still making losses.

• Comparing 2QFY24 against 1QFY24 however, KLK’s manufacturing EBIT rose by 42.2% to RM82.3mil in 2QFY24, underpinned by stronger demand. EBIT margin edged up to 1.9% in 2QFY24 from 1.3% in 1QFY24.

• In its results announcement, KLK said that a more positive outlook is emerging in the oleochemical industry in Europe. There was an uptick in demand in 2QFY24 compared to 1QFY24. Also, the cost of doing business in Europe is improving as energy costs have declined. On a negative note, demand from China is sluggish.

• KLK is currently trading at a decent FY25F PE of 16x, below the 5-year mean of 18x for big-cap planters.

Source: AmInvest Research - 21 May 2024