FY21 core net profit of RM1.86nm (+164.3%) beat expectations, accounting for 120.6-126.3% of our and consensus estimates, due mainly to better-than-expected contribution from 20%-owned associate (Synthomer plc). We raise our FY22-23 core net profit forecasts by 46.4% and 30.7%, mainly to reflect higher CPO price, but partially offset by lower fertiliser cost assumptions. We note that our FY22-23 CPO price assumptions are now RM3,688/mt and RM3,050/mt (vs. RM3,125/mt and RM2,900/mt in FY22-23 previously). Following the upward revision in our core net profit forecasts and roll-forward of valuation base year (from FY22 to FY23), we maintain our BUY rating on KLK with a higher sum-of parts TP of RM25.62 (from RM25.33 previously).

Beat expectations. 4QFY21 core net profit of RM732m (QoQ: +64.9%; YoY: +390.4%) took FY21’s sum to RM1.86bn (+164.3%). The results came in above expectations, accounting for 120.6-126.3% of our and consensus estimates, due mainly to better-than-expected contribution from 20%-owned associate (Synthomer plc).

Exceptional items (EIs) in FY21. Core net profit of RM1.86bn was arrived after adjusting for (i) RM74.6m fair value gain on outstanding derivative contracts at plantation segment, (ii) RM486.9m disposal gain, (iii) RM19m write-offs, (iv) RM98.2m forex gain, (v) RM95.2m impairment on PPE.

QoQ. Core net profit surged 64.9% to RM732m in 44QFY21, boosted mainly by (i) higher CPO and PK sales volume, realised average CPO price and contribution from processing and trading operations, coupled with a one-month earnings contribution from newly acquired subsidiary (IJMP), and (ii) recognition of earnings from 20%-owned associate (Synthomer plc). These were, however, partly moderated by weaker performance at manufacturing (as higher raw material prices squeezed profitability) and property segments.

YoY. Core net profit more than tripled to RM732m in 4QFY21 (from RM149.3m SPLY), boosted mainly by (i) higher CPO sales volume, realised average CPO price and contribution from processing and trading operations, coupled with a one-month earnings contribution from newly acquired subsidiary (IJMP), (ii) improved manufacturing performance (arising from better performance from China and Europe operations), and (iii) significantly higher contribution from Synthomer.

YTD. Core net profit more than doubled to RM1.86bn in FY21 (from RM704.3m a year ago), boosted mainly by significantly higher palm product prices, improved downstream performance (owing to better performance from China and Europe operations), improved earnings at farming sector, and significantly higher earnings from Synthomer.

Outlook. Management shared the strong performance achieved in FY21 will be sustained into FY22, with performance at plantation segment will improved further in FY22, backed by strong prevailing CPO prices and earnings contribution from newly acquired subsidiary (IJMP). Contribution from manufacturing segment, on the other hand, will likely remain stable despite challenges from volatile raw material prices and logistic issue (resulted from Covid-19 pandemic).

Forecast. We raise our FY22-23 core net profit forecasts by 46.4% and 30.7%, mainly to reflect higher CPO price, but partially offset by lower fertiliser cost assumptions. We note that our FY22-23 CPO price assumptions are now RM3,688/mt and RM3,050/mt (vs. RM3,125/mt and RM2,900/mt in FY22-23 previously), and our new forecasts have yet to reflect contribution from newly acquired IJMP.

Maintain BUY, with slightly higher TP of RM25.62. Following the upward revision in our core net profit forecasts and roll-forward of valuation base year (from FY22 to FY23), we maintain our BUY rating on KLK with a higher sum-of-parts TP of RM25.62  (from RM25.33 previously).

Source: Hong Leong Investment Bank Research - 24 Nov 2021