Kuala Lumpur Kepong (KLK)’s reported a 56% YoY decline in core profit for 9M23 to RM683.5mn, in tandem with 11% YoY drop in revenue, resulting from: 1) lower profit contribution from plantation segment due to higher production costs and weaker palm products prices (CPO: -16% YoY; PK: -44% YoY), despite a slight improvement in FFB production, 2) lower profit contribution from oleochemicals division due to weak demand and challenging business environment, and 3) lower gross margin from a newly launched property development. Overall, 9M23’s core profit trailed our and consensus estimates, representing 55% and 49% of FY23 full year forecast, respectively. In light of these developments, we revised lower our FY23/24 earnings forecast, and hence, a new lower TP of RM24.05 versus RM24.53 previously. Maintain HOLD.

• Below expectations. KLK’s 9M23 core profit came in below our and consensus’ estimates.

• QoQ. On QoQ basis, subdued core PBT of RM190.4mn (-72% QoQ) was due to 1) higher production cost of CPO, lower sales volume and ASP realised of CPO and PK from plantation segment, 2) loss of RM73.7mn from manufacturing segment against a profit of RM186mn in 2Q23, on account of losses from oleochemical division, refineries and kernel crushing operations, and 3) lower profit contribution from property development segment.

• YoY/YTD. PATAMI came in lower, slipped by 85%/58% YoY/YTD on the back of 27%/11% drop in revenue to RM5.11bn and RM17.87bnn respectively, due to lower profit contribution from all segments.

• Outlook. As we anticipate ongoing volatility in CPO prices in the near term due to supply-demand concerns stemming from uncertainties in the macroeconomic outlook and business environment, we maintain a cautious view on KLK’s near-term prospects. This outlook is supported however by its strong balance sheet and effective cash flow generation. Lower-than-expected palm product prices and higher production costs for upstream segment remain a concern notwithstanding. Additionally, softer demand for oleochemicals due to negative consumer sentiment and stiff competition from alternative substitute products will likely contribute to further margin squeeze in the downstream segment.

• Earnings forecast. Following the disappointing results, we revised lower our FY23F/FY24F earningsforecast to RM872mn/RM822mn from RM1.25bn and RM1.16bn 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. Maintain a HOLD call with a new lower TP of RM24.05 versus RM24.53 previously; based on historical low 3-year average P/BV of 1.74x pegged to KLK’s BV/share of RM13.82, as we roll our valuation to FY24.

Source: BIMB Securities Research - 25 Aug 2023