1QFY23 core net profit of RM589.9m (+11.2% QoQ; +13.7% YoY) beat expectations, accounting for 34.0-34.9% of our and consensus full-year estimates, due mainly to better-than-expected FFB output and lower-than effective tax rate. We raise our FY23-24 core earnings forecasts by 6.2% and 1.5%, respectively, mainly to account for higher FFB yield assumption (for FY23-24) and lower effective tax rate (for FY23). Post earnings revision and recalibration of valuation parameters, we maintain our BUY rating on KLK with higher sum-of-parts TP of RM26.27.

Beat expectations. 1QFY23 core net profit of RM589.9m (+11.2% QoQ; +13.7% YoY) beat expectations, accounting for 34.0-34.9% of our and consensus full-year estimates, due mainly to better-than-expected FFB output and lower-than effective tax rate.

Exceptional items (EIs) in 1QFY23. Core net profit of RM589.9m in 1QFY23 was arrived after adjusting for (i) RM70.1m fair value change on outstanding derivative contracts at plantation segment, (ii) RM5.3m fair value gain on valuation of unharvested FFB, (iii) RM8.0m net write-back, (iv) RM42.7m disposal gains, (v) RM144.4m forex loss, (vi) RM11.6m gain on derivative.

QoQ. Core net profit increased by 11.2% to RM589.9m in 1QFY23, helped by higher CPO and PK sales volume, improved contribution from manufacturing segment (thanks to better performance at oleochemical division, refineries and kernel crushing operations) and lower tax expense, but partly moderated by lower realised palm product prices, lower property earnings and absence of earnings contribution from Synthomer plc.

YoY. Core net profit increased by 13.7% to RM589.9m in 1QFY23, as weaker contribution from plantation segment (arising from lower realised palm product prices and higher production cost, but partly mitigated by a 10.5% increase in FFB production) and weaker manufacturing performance were mitigated by lower tax expense.

Outlook. KLK sees challenging prospects in FY23, as current palm oil market remains uncertain (arising from trade policy changes in both consuming and producing countries, lingering geopolitical tensions). Besides, operating environment for oleochemicals business is expected to face persistent headwinds (particularly in Europe) amidst global recessionary fear.

Forecast. We raise our FY23-24 core earnings forecasts by 6.2% and 1.5%, respectively, mainly to account for higher FFB yield assumption (for FY23-24) and lower effective tax rate (for FY23).

Maintain BUY, with higher TP of RM26.27. Post earnings revision and recalibration of valuation parameters (following the release of FY22 annual report), we maintain our BUY rating on KLK with higher sum-of-parts TP of RM26.27 (from RM25.61 earlier).

Source: Hong Leong Investment Bank Research - 23 Feb 2023