Kuala Lumpur Kepong (KLK) 2Q23’s PATAMI of RM190.8mn (QoQ: - 57%, YoY: -65%) came-in below our and consensus estimates  accounting for only 33% and 37% of full year forecast respectively.  While KLK demonstrates a strong balance sheet and effective cash  flow generation, we approach its near-term earnings growth  prospects with cautious optimism. This sentiment arises from  potential margin pressures in both the upstream and downstream  segments, stemming from concerns over lower average selling  prices (ASP) of palm products and demand, as well as the potential  additional losses in joint ventures and associate. Downgrade our call  from a BUY to a HOLD with a new TP of RM24.53 versus RM25.23 previously.

• Below expectations. KLK’s 2Q23 core profit was below our and  consensus’ estimates.

• QoQ. KLK reported a lower core PBT of RM190.8mn for 2Q23 (- 57% QoQ) mainly due to 1) lower sales volume and ASP realised of CPO and PK from plantation segment, 2) lower profit  contribution from manufacturing segment (-27% QoQ) on account  of lower profit from refineries and kernel crushing operations, and  3) share of loss from overseas associate and JV, amounting to  RM162mn and RM14mn respectively hampered by non-operating  charges incurred on impairment loss of a business division,  amortisation of acquired intangibles, restructuring and site  closure costs.

• YoY/YTD. PATAMI came in lower, slipped by -65%/-45% YoY/YTD on the back of -5%/-3% drop in revenue to RM6.05mn and  RM12.76bnmn respectively, no thanks to 1) lower average selling  price (ASP) realised of CPO and PK, 2) loss from associate and JV,  and 3) higher in finance cost.

• Dividend. The Board has declared an interim DPS of 20sen for  FY23 (1Q22: 20sen). At the current market price, this would  translate into a yield of 0.9%.

• Outlook. We are cautiously optimistic on KLK’s near-term  earnings growth prospects though it has a solid cash flow  generation amid the paring down of its debt to 47% in 2Q23 from  the highest of 62% in 2Q22. This is due to the possibility of further  margins squeeze from both its upstream and downstream  segments on concerns over lower ASP of palm products and  demand as well as further loss in JV and associate that may impact  its bottom-line. As such, we revised lower our FY23F/24F earnings  to RM1.25bn/1.16bn from RM1.89bn/RM1.74bn previously; as  we revisit our assumptions on costs and margins to better reflect  our current and future expectations on KLK’s business operations.

• Our call. Downgrade our call from a BUY to a HOLD with a new TP  of RM24.53 versus RM25.23 previously based on historical low 3- year average. P/BV of 1.74x to FY23 BV/share of RM14.10.

Source: BIMB Securities Research - 25 May 2023