• HOLD (TP: RM24.05). Kuala Lumpur Kepong (KLK) 1QFY24 core PATAMI of RM204mn came in within our forecast but trailed consensus estimates at 25% and 14%, respectively. Its earnings performance has gained traction with core profit growing by 36% QoQ, despite a 2% decline in revenue to RM5.64bn mainly supported by recovery in manufacturing segment (RM25.3mn vs. a loss of RM102mn in 4QFY23) and higher sales volume of CPO and PK, as well as better PK selling price realised at RM1,800/MT (4QFY23: RM1,743/MT) in plantation segment. We believe the company will experience further recovery ahead despite challenging factors driving key segmental growth on all fronts. With the upside potential of 6% from our TP, we downgraded the stock to a HOLD from BUY with an unchanged TP of RM24.05; based on hist. low 3-year avg. P/BV of 1.74x pegged to KLK’s BV/share of RM13.82.

• Key highlights. On YoY basis, core PBT dropped by 50% YoY to RM343mn, reflecting a 16% decline in revenue at RM5.64bn, mainly due to 1) lower ASP realised of CPO and PK from plantation segment, 2) lower profit contribution from manufacturing segments, which fell sharply by 90% YoY to RM25.3mn from RM254mn in 1QFY23, no thanks to loss incurred by the Oleochemicals division which was impacted by eroded profit margin and lower profit contributions from refineries and kernel crushing operations, and 3) a loss of share in JV of RM1.44mn vs. profit of RM4.71mn in 1QFY23.

• Outlook. While the plantation segment is expected to sustain its performance, albeit at current palm product prices; the manufacturing segments may face challenges in the business environment, in our view, particularly with increased competition from new oleochemical entrants. Despite this, demand for oleochemical products is projected to remain stable, driven by the Group's observations of stronger demand in Europe and Southeast Asia for the second quarter of FY2024. However, there is a possibility that margins could erode due to higher costs and lower utilization.

Source: BIMB Securities Research - 21 Feb 2024