Kuala Lumpur Kepong posted FY23 core earnings of RM824.1m (-64.8% YoY) after stripping out 1) surplus on disposal of land (RM10.2m), 2) surplus on government acquisition of land (RM42.2m), 3) FX loss (RM159m), 4) gain on derivatives (RM68m), 5) surplus on disposal of a business line (RM76.4m), and impairment of PPE (RM27.8m). The weaker-than-expected full-year results, making up only 81% and 69% of our and the market estimates, respectively, were due to losses of RM312.9m incurred by non-core businesses. Nevertheless, no changes to our earnings forecasts as we expect to see better CPO prices and better FFB production as well as minimal losses from non-core businesses in FY24F. Maintain Neutral with an unchanged SOP-based TP of RM21.39. No dividend was declared for the quarter.

• 4QFY23 revenue (QoQ: +13%, YoY: -17.2%). During the quarter, revenue fell 17% YoY to RM5.8bn mainly due to weaker contribution from plantation and manufacturing segments. Plantation sales softened by 5.4% YoY to RM909.3m, dampened by the decline in both CPO and palm kernel prices. 4QFY23 average realised CPO price slipped from RM3,815/mt to RM3,476/mt while average palm kernel price dropped 16.3% YoY to RM1,743/mt. 4QFY23 FFB production rose 6.1% YoY to 1.49m mt (FY23: 5.25m mt, YoY: +5.2%) Manufacturing sales fell 20% YoY to RM4.7bn on the back of weaker sales from oleochemical. On the other hand, property sales jumped 39.3% YoY to RM68m, mainly attributed to encouraging property sales units from Bdr. Seri Coalfield.

• Core earnings shrank 61% YoY. Stripping out the exceptional items, the group’s core earnings retreated by 61% YoY to RM192m, due to weaker plantation earnings and losses at their manufacturing segment. Plantation pre-tax earnings dropped 19% YoY to RM417m, due to lower unrealized gain of RM7.2m and provision for impairment of plasma receivables amounted to RM60.5m. Manufacturing reported a loss of RM102.1m, mainly attributed to loss incurred by the oleochemical segment, attributed to the reduced profit margin and one-time restructuring cost of RM70.6m and lower profit contributions from the refineries and kernel crushing operations. On the other hand, property earnings slipped from RM18.7m to RM14.6m due to recognition of development profits from phases with lower gross margin. Lastly, investment holding also registered a loss of RM86.2m due to share of equity loss of RM24.6m from an overseas associate, Synthomer and higher loss of RM12m by the farming sector.

• Prospects. Management has overcome the issues with worker shortage and is now focusing on maintaining high replanting standards for better yields. In the manufacturing segment, despite the tough competition from new oleochemical entrants, the group expects modest improvements for FY24.

Source: PublicInvest Research - 23 Nov 2023