Investment Highlights

• We maintain BUY on KL Kepong (KLK) with an unchanged fair value of RM25.20/share, based on FY25F PE of 25x, which is the 5-year average of big-cap planters. We attach a neutral 3-star ESG rating to KLK.

• We forecast KLK’s FFB production to grow by 6% in FY24E (7MFY24: 9.3% YoY; FY23: 5.2%). 50%-60% of KLK’s FFB come from Indonesia. Weather conditions at KLK’s oil palm estates in Malaysia and Indonesia have been favourable so far. KLK does not face any labour shortage currently.

• We think that KLK’s ex-mill cost of production would be RM2,000/tonne in FY24E (FY23: RM2,229/tonne) as the volume of FFB output rises by 6% and fertiliser costs fall by 15%. KLK sources its fertiliser supply every 6 months.

• Prospects for KLK’s oleochemicals division are improving. We understand that demand is picking up while selling prices have bottomed. We believe that consumer companies in Europe and ASEAN are re-stocking inventories. We forecast KLK’s manufacturing EBIT (refining and oleochemicals) to recover by more than 30% in FY25F after falling by 11% to RM350.4mil in FY24E.

• However, outlook for the refining division is unexciting due to a glut in Indonesia. Refining capacity in Indonesia is almost twice the size of the country’s CPO production of 48mil-50mil tonnes. To mitigate this, KLK’s refineries in Malaysia are expanding into value-added products such as shortenings.

• KLK has almost completed its preparations for the EU Deforestation Regulation (EUDR), which will be implemented on 31 December 2024. The group has different storage tanks for EU-compliant and non- compliant CPO. Also, KLK has prepared documents with pre-requisite information such as geolocation coordinates. Recall that under EUDR, buyers are not allowed to buy products from areas that were deforested after 31 December 2020.

• KLK’s capex is estimated at RM2bil in FY24E (FY23: RM1.6bil) mainly due to the construction of the palm refinery in East Kalimantan and expansion of the fatty alcohol plant at Westports. In FY25F, we forecast KLK’s capex to decline to RM1.2bil, which would improve its net gearing. KLK’s net gearing stood at 51.6% as at end-FY23.

• KLK is currently trading at a FY25F PE of 14.6x, which is marginally below its 2-year average of 15x.

Source: AmInvest Research - 3 Jul 2024