9MFY21 CNP of RM960m came above our (83%) and consensus (79%) estimates due to higher CPO prices. FFB improvements and firm CPO price should boost 4QFY21 earnings, but could be partially offset by higher tax and slightly weaker downstream. We raise FY21-22E earnings by 19-5% on higher CPO prices. Maintain OP with lower TP of RM23.60, on lower rolled-over FY22E PER of 20x (-1.0SD). Still our preferred integrated pick with: (i) FFB boost from M&As, (ii) -1.5SD valuation, and (iii) stable foreign shareholding levels.

Above expectations. KLK registered 3QFY21 core net profit* (CNP) of RM392m (+34% QoQ; +101% YoY) which brought 9MFY21 CNP to RM960m (+73% YoY), which is above both our/consensus’ estimates at 83%/79% due to higher CPO prices. 9MFY21 FFB output of 2.84m MT (-1% YoY) accounted for 72% of our full-year estimate. Absence of dividend was as expected.

Results’ highlight. YoY, 9MFY21 CNP rose (73%) stemming from: (i) higher plantation segmental profit (+83%) on higher CPO/PK prices (+31%/+54%), and (ii) manufacturing segment’s profit (+79%) due to better performance in Malaysia, China and Europe. QoQ, 3QFY21 CNP rose (+34%) mainly driven by higher plantation profit (+55%) attributable to higher CPO/PK prices (+15%/+6%), as well as an 8% improvement in FFB.

Upstream should continue to do well. With expected improvements in FFB production and firm QTD4QFY21 CPO price (+3% QoQ), we expect 4QFY21 earnings to show similar strength. However, the impact could be partially offset by: (i) higher taxation, as well as (ii) weaker downstream (due to prolonged lockdown restrictions). On the proposed acquisition of IJMP, shareholders’ approval will be required at an EGM to be held on 27th August 2021. The proposed acquisition is expected to be completed by mid-Sep, while the closing date of the proposed MGO is estimated at end-Oct.

Raise FY21-22E earnings by 19-5% on FY21-22E realized CPO price of c.RM3,250-2,950/MT (from ~RM2,800/MT).

Maintain OUTPERFORM but with a lower TP of RM23.60 (from RM24.00), based on a rolled-over FY22E PER of 20x (from 22x), reflecting -1.0SD valuation on additional ~10% ESG discount. Based on our in-house ESG scoring, KLK ranks third with a score of 78%. KLK is still our preferred integrated pick given its: (i) FBMKLCI status, (ii) potential FFB boost from acquisitions, (iii) attractive FY22E PER of 16.8x (close to -1.50SD), and (iv) stable monthly (1-year) foreign shareholding levels.

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

Source: Kenanga Research - 19 Aug 2021