• Maintain BUY (TP: RM24.05). Kuala Lumpur Kepong (KLK) FY24’s core PBT of RM1,281mn (+12% YoY), was broadly in line with our forecast but fell short of consensus estimates, at 105% and 84% of full year forecast respectively. The deviation against the reported PATAMI of RM591mn was due to unrecognized tax losses and exceptional losses, including: 1) RM315.7mn losses from its Synthomer PLC investment (with RM180mn impairment), and 2) a RM50.8mn inventory write-down at KLK Hardwood Flooring. Earnings were supported by strong plantation segment performance, with margins rising to 43.1% (+9ppts YoY) and profit increasing 39% YoY to RM1.62bn. This was driven by higher CPO and PK sales volumes and prices (CPO: RM3,653/MT, +0.4% YoY; PK: RM2,115/MT, +14.9% YoY) alongside lower CPO production costs due to a 4.2% increase in FFB production to 5.47mn tonnes. Conversely, the manufacturing segment underperformed due to higher losses in non-oleochemical operations and weak refinery and kernel crushing performance. We remain cautiously optimistic on the manufacturing segment, expecting a gradual recovery in the European oleochemical sub-segment despite persistent challenges and overcapacity in refining. Maintain a BUY call with an unchanged TP of RM24.05, based on unchanged P/BV of 1.74x, pegged to KLK’s BV/share (FY25- 26F) of RM13.82.

• Key Highlights. Segment-wise, the Plantation segment’s higher profit was driven by: i) increased sales volumes of CPO and PK, ii) higher realized PK selling prices at RM2,523/MT (+12.1% QoQ, +44.8% YoY), and iii) reduced CPO production costs. Consequently, the Plantation segment's profit margin improved significantly by +16.5 ppts QoQ to 56.9%. Conversely, the downstream business faced losses in the manufacturing segment, attributed to higher losses from the non-oleochemical division, as well as weak performance in refinery and kernel crushing operations.

• Outlook. We are of the view that profit growth in FY25-26 to be driven by stable production, favourable palm oil prices, and lower production costs. In the Manufacturing segment, we anticipate a gradual recovery in the oleochemical sub-segment especially in Europe due to rising demand and margin improvements despite global challenges and heightened competition. Key risks include: (i) economic slowdowns in key markets, (ii) oversupply of vegetable oils or regulatory changes impacting CPO prices, and (iii) lower FFB and CPO production from adverse weather conditions.

Source: BIMB Securities Research - 27 Nov 2024