1HFY21 CNP of RM567m came above our(56%), butwithinconsensus’ (51%), estimate, due to better downstream segment. We expect sequential earnings improvement on higher CPO price and production recovery, but the impact could be slightly dampened by: (i) Indonesia’s cap on realised CPO price, and (ii) Malaysia’s MCO 3.0. Raise FY21-22E earnings by 13-7%. Maintain OUTPERFORM with lower ESG-adjusted TP of RM25.10, on lower CY21E PER of 23x (- 1.0SD). Still our preferred integrated pick - attractive at current price (CY21E PER of 20x; close to -1.50SD).

Above expectations. KLK registered 2QFY21 core net profit* (CNP) of RM292m (+6% QoQ; +63% YoY) which brought 1HFY21 CNP to RM567m (+58% YoY), which is above our estimate (56%), but within consensus’ (51%) due to higher-than-expected manufacturing contribution and margin. 1HFY21 FFB output of 1.87m MT (flat YoY) accounted for 46% of our full-year estimate. An interim dividend of 20.0 sen was declared, as expected.

Results’ highlight. YoY, 1HFY21 CNP rose (+58%) driven by: (i) higher plantation segmental profit (+73%) on higher CPO/PK prices (+20%/+42%), and (ii) manufacturing segment’s profit (+76%) due to better performance in Malaysia, China and Europe. QoQ, 2QFY21 CNP rose (+6%) mainly driven by higher manufacturing profit (+43%) attributable to higher manufacturing sales (+12%) and improvement in margin (+1.7ppt).

Upstream to improve on higher CPO price and production recovery. QTD 3QFY21 CPO price has increased (+12% QoQ). While we expect sequential earnings boost from higher CPO price and improvement in FFB output, we think the impact could be dampened as: (i) full benefits of higher CPO price will be capped by its Indonesia’s upstream operations, and (ii) downstream consumption patterns could be affected during Malaysia’s MCO 3.0.

Raise FY21-22E earnings by 13-7% on higher manufacturing contribution (+8%/+4%) and margin of 7.5%/7.0% (vs. 6% previously).

Maintain OUTPERFORM but with a lower ESG-adjusted TP of RM25.10 (from RM25.40), based on a lower FY21E PER of 23x (from 26x). Our ascribed PER reflects -1.0SD valuation (-0.5SD previously) to reflect ESG discount. Based on our in-house ESG scoring, KLK ranks third with a score of 78%. The stock is still our preferred integrated pick given attractive CY21E PER of c.20x (close to - 1.50SD).

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

Source: Kenanga Research - 20 May 2021