FY20 CNP of RM750m (+23% YoY) came within our (98%), but below consensus’ (90%), estimate. We expect sequential improvement in 1QFY21 on higher CPO price (QTD1QFY21: +13% QoQ). FFB output decline in Malaysia could be cushioned by Indonesia’s production (peak season). No changes to FY21E CNP and introduce FY22E CNP of RM973m on 4% FFB growth. Reiterate OUTPERFORM with TP of RM26.00 based on unchanged FY21E PER of 30x (-0.5SD). Still our big-cap Top Pick - attractive at current price (FY21E PER of 26.9x; -1.25SD).

Within expectations. KLK registered 4QFY20 core net profit* (CNP) of RM197m (+35% YoY; +1% QoQ). This brought FY20 CNP to RM750m (+23% YoY), within our estimate (98%), but below consensus’ (90%). FY20 FFB output of 3.93m MT (-4% YoY) was spot on our full-year estimate. The absence of DPS declared is as expected. Similar to FY20, we expect KLK to announce a final dividend at a later date (FY18: declared in Dec 2018; FY19: declared in Jan 2020).

Propelled by upstream. YoY, FY20 CNP rose (+23%) mainly driven by upstream as plantation segmental profit rose (+86%) on higher CPO/PK prices (+22%/+14%) which outstripped lower FFB output (-4%). QoQ, despite higher CPO/PK price (+7%/+6%) and FFB output (+3%), plantation segmental profit fell (-10%) due to: (i) unrealized loss from FV changes in derivative contracts (vs. unrealized gain in 3QFY20), and (ii) forex loss of RM8.1m (vs. forex gain of RM27.4m in 3QFY20). The decline in upstream was negated by its downstream segmental profit improvement (+10%) on higher sales volume in Malaysia and China.

1QFY21 to gain on higher CPO prices. QTD in 1QFY21 CPO price has increased (+13% QoQ). Premised on that, we expect to see sequential earnings improvement in 1QFY21, despite a seasonal dip in Malaysia FFB output. As we understand, Indonesia’s production has yet to peak and KLK’s geographical mix of estates in Indonesia is significant (c.55-58%). While it is too early to tell, we do not discount the possibility that KLK’s 1QFY21 FFB output could show similar strength as in 4QFY20. Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks.

Earnings estimate. No changes to FY21E CNP as results were in line with expectations. Introduce FY22E CNP of RM973m based on FFB growth of 4%.

Reiterate OUTPERFORM with an unchanged TP of RM26.00 based on unchanged FY21E PER of 30x (in line with large cap peers’ average), reflecting -0.5SD valuation. While KLK’s share price has risen 7.5% since our upgrade (report date: 21 Oct 2020), it is still trading at an attractive FY21E PER of 26.9x (-1.25SD). This is despite its: (i) integrated status which offers more earnings stability, (ii) strong FY21E FFB growth of 10-15%, and (iii) strong oleochemicals demand outlook.

Risks to our call are sharp decline in CPO prices and significant rise in fertiliser/transportation costs.

Source: Kenanga Research - 19 Nov 2020