Overview. Kuala Lumpur Kepong Bhd (KLK) reported a lower core PBT of RM685.4mn for 4Q22 (-20% YoY/-9% QoQ), which is in line with lower revenue of RM6.71bn (-2% YoY/-4% QoQ) mainly due to 1) lower CPO and PK average selling price realised and higher production costs from plantation segment, and 2) lower profit contribution from manufacturing segment (- 20% YoY/+55% QoQ) on account of lower profit contribution from the Oleochemicals division. This was also dampened by lower share of profit from overseas associate and JV, amounting to RM1.26mn (-63% YoY/-99% QoQ) and RM4.71mn (-63% YoY/-87% QoQ) respectively.

Against estimates: Inline. KLK’s 1Q23 core profit was within our estimates, making up 26% of our full-year forecast. The variance was after adjusting for 1) RM0.8mn on land disposal gain, (2) RM41.88mn surplus on government acquisition of land, (3) RM12mn gain on derivatives, and (4) RM144mn forex loss.

Outlook. Although we expect CPO price to soften in 2023 with continued volatility due to stiff competition from other edible oils, we however remain optimistic on KLK’s long-term earnings growth prospects. Its manufacturing arm, which makes up c. 30%-35% of group PBT, is expected to be in better shape and will help to cushion any large falls in plantation earnings due to an expected reversal in CPO prices and an increase in production cost. It has solid cash flow generation and pared down its debt to 47% in 1Q23 from the highest of 62% in 2Q22 due to the acquisition of IJM Plantations and PT Pinang Witmas Sejati.

Our call. Maintain a BUY call on KLK with new TP of RM25.23 versus RM28.77 previously based on historical low 3-year avg. P/BV of 1.74x to FY23 BV/share of RM14.50. We have done some housekeeping and hence, revised our FY23F earnings to RM1.9bn from RM2.0bn previously and introduce FY24F as we revisit our assumptions on production, margins, costs and expenses to better reflect our current and future expectations on KLK’s business operations.

Source: BIMB Securities Research - 23 Feb 2023