Highlights from our recent virtual meeting with KLK include (i) high FFB output target of 5.9m tonnes in FY22, (ii) higher fertiliser prices to drive CPO production cost higher by 20-25% in FY22, (iii) rising sales volume at oleochemical sub - segment will likely be moderated by weaker margins (on the back of volatile feedstock prices and stiff competition), and (iv) contribution from property development segment will remain stable (with earnings contribution of RM15 - 20m a quarter). Maintain our FY22-24 earnings forecasts, TP of RM32.43 and BUY rating on KLK.

Ambitious FY22 FFB output guidance. Management set a high FFB output growth target of 5.9m tonnes in FY22 (+53.3% from 3.85m tonnes in FY21), supported mainly by (i) FFB contribution from the acquisition of IJMP (which is expected to contribute to 20% of the group’s FFB), (ii) an additional 8-10k ha of harvesting area coming into maturity, and (iii) yield recovery (assuming labour shortage eases). However, we believe it is unlikely for KLK to achieve such high FFB output in FY22, as (i) labour shortage issue remains unresolved, and (ii) FFB output only grew 28.4% to 1.98m tonnes during the first five months of FY22, which indicates that monthly FFB output would have to grow by ~70% YoY for the remaining seven months of FY22. In our forecast, we are projecting FFB output of 4.75m tonnes in FY22 (which translates to an FFB output growth of 23.4%).

Forward sales. KLK has locked in 60% of its FFB output in Malaysia (equivalent to ~10% of its group’s output) at above RM4,000/mt.

Higher CPO production cost in FY22. We understand that KLK has recently secured majority of its fertiliser requirement for 2HFY22 at sharply higher prices (+50% from FY21), which will result in its FY22 production cost rising by 20-25% to RM1,800- 1,900/tonne. Recently announced minimum wage hike in Malaysia, on the other hand, will have minor impact on its FY22 CPO production cost (by ~RM25/tonne, based on our estimates). We understand that more meaningful cost synergies arising from the acquisition of IJMP could only be achieved over the longer term, as it takes time to rehabilitate brown field plantation land.

Manufacturing. KLK’s manufacturing segment’s core PBT more than doubled to RM274.7m in 1QFY22 (from core PBT of RM107.2m in 4QFY22), boosted mainly by improved performance at oleochemical sub-segment (which was in turn driven by higher sales volume). While high sales volume at oleochemical sub-segment will sustain into the near term, this will likely be moderated by weaker margins (on the back of volatile feedstock prices and stiff competition).

Property contribution to remain stable. Contribution from property development segment will remain stable (with earnings contribution of RM15-20m a quarter), supported by property launches in small phases.

Forecast. Maintain based on unchanged FY22-24 CPO price assumptions of RM3,742/3,256/3,097 per tonne. Based on our estimates, every RM100/tonne change in our CPO price assumption will result in KLK’s FY22-24 core net profit forecasts changing by 3-4%.

Maintain BUY; TP: RM32.43. We maintain BUY rating on KLK with unchanged sum of-parts TP of RM32.43 (see Figure #1). KLK remains as one of our top picks for the sector, given its decent valuations. At RM26.72, KLK is trading at FY22-23 P/E of 15.5- 20.3x.

Source: Hong Leong Investment Bank Research - 7 Apr 2022