KUALA LUMPUR (Nov 23): Analysts remain optimistic on Kuala Lumpur Kepong Bhd (KLK), with Hong Leong Investment Bank (HLIB) upgrading its call on the planter to “buy” from “hold”, with a target price (TP) of RM24.05, after KLK’s results met expectations.

Notably, KLK posted a core net profit of RM385.8 million in the fourth quarter of 2023 (4Q2023), marking a substantial quarter-on-quarter (q-o-q) increase of 114.8%, while the year-on-year (y-o-y) comparison reveals a decline of 27.3%.

This brings FY2023’s full year core net profit to RM1.4 billion, indicating a significant decrease of 40.3% compared to the same period last year, according to the research house.

According to a note on Thursday, HLIB stated that these results beat its expectations, accounting for 108.9% of its and 117.4% of the consensus estimates, due mainly to better-than-expected fresh fruit bunches (FFB) output growth, which is 6.1% compared to the 5.6% it assumed earlier.

Year-to-date, FY2023 core net profit shrank by 40.3%, mainly attributed to the significantly lower realised palm product prices and higher crude palm oil (CPO) production cost at the upstream segment, sharply lower contribution from the manufacturing segment, and loss incurred at Synthomer plc.

However, HLIB remains optimistic despite the challenging operating environment for the manufacturing segment, which arises from persistently high energy costs and weak demand sentiment in Europe, coupled with slow economic recovery and competition from new entrants in China.

It believes this will be mitigated by KLK management’s strategic initiatives to contain losses in European operations and continued efforts to enhance the upstream segment’s operational efficiency.

Meanwhile, MIDF Research maintained its “buy” call on KLK, with an unchanged TP of RM 24.60.

The research house opined that KLK’s upstream division remained intact, post the discontinued Boustead Plantations Bhd (BPlant) acquisition.

“While KLK’s overall yields for FY2022 were among the lowest in the past 10 years due to yield dilution from IJM Plants (IJM Plantations Bhd) acquisition in the prior year, they remain among the top tier if we were to compare in terms of OER (oil extraction rate), FFB yield, age profile, and oil yield.

“Its profit possesses a mixture of downstream segments, circa 20%–25%, that can possibly withstand any downside risk in CPO volatility,” it added.

Meanwhile, PublicInvest Research noted that the weaker-than-expected full-year results made up only 81% of its and 69% of the market estimates, which were due to losses of RM312.9 million incurred by non-core businesses.

However, it made no changes to its earnings forecasts, as it expects to see better CPO prices and better FFB production, as well as minimal losses from non-core businesses in FY2024F.

PublicInvest Research maintained its “neutral” call on KLK, with an unchanged sum-of-parts-based TP of RM21.39.

On the other hand, TA Securities viewed KLK less optimistically and maintained a “sell” call on it, with a higher TP of RM21.50, from RM21.28.

“Management is cautiously optimistic about the FY2024 outlook, amid a high interest environment, as well as geopolitical conflicts, which could weigh heavily on the global economy.

“The increase in global oilseed production in 2024 on larger soybean and sunflower seeds could potentially pose a downside risk to CPO prices.

“Meanwhile, the development of an El-Nino event will likely continue until at least early 2024, with a subsequent weakening thereafter. We believe El Nino has a positive impact on CPO prices, as the event is deemed to be a strong market sentiment issue. However, the weather impact may be offset by an easing labour crunch and result in efficiency in crop recovery.” it added.

At the time of writing, KLK was trading down 24 sen or 1.12% at RM21.28, giving it a market capitalisation of RM 23 billion.

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