Kenanga Research & Investment

Kuala Lumpur Kepong - Strong 1Q but Within Expectations

Publish date: Thu, 17 Feb 2022, 09:23 AM

1Q FY22 Core Net Profit (CNP) came in within expectation, at 25% of our full year CNP and 23% of recently upgraded consensus’ NP. Strong palm oil prices lifted 1Q CNP by 83% YoY to RM505m but still weaker by 30% QoQ due to lumpy associate earnings in 4Q. Although palm oil prices should ease over the next 2-3 months, edible oils & fats supply for CY22 will probably stay tighter than projected on poorer South American soyabean harvest. Elevated CPO prices are thus expected to stay longer than earlier anticipated. As we have nudged up both our CPO price assumptions as well as fruit production cost, the impact on FY22 is negligible. KLK is our preferred integrated pick thanks to earnings boost from acquiring 95% of IJM Plantations in November 2021 and strong oleochemical demand. Maintain OP and TP of RM30.00, on FY22E PER of 16x.

Within expectations: The strong 1QFY22 CNP was largely underpinned by:

(a) Very strong 1Q Plantation EBIT* of RM598m (+40% QoQ, +114% YoY) on average CPO prices of RM4,063 per MT (+12% QoQ, +50% YoY). FFB output also rose to 1.266m MT (+26% QoQ, +30% YoY) following the acquisitions of (i) 56% in IJM Plantations in Sept 2021 (later raised to 95% in Nov 2021) and (ii) 60% in PT Pinang Witmas Sejati in Oct 2021 which owns 14,980 Ha of planted oil palm in Sumatra.

*Note effective 1 Oct 2021, refining & kernel crushing EBIT has been reclassified from Plantation to Manufacturing.

(b) 1Q Manufacturing EBIT surged to RM331m (+15% QoQ, +129% YoY) largely on the near doubling in oleochemical contributions on both QoQ and YoY basis. Refining & kernel crushing earnings were almost halved that in 4Q but stronger YoY.

(c) Property earnings improved QoQ but was weaker YoY due to lower margin sales mix compared to a year ago.

Outlook for FY22-23: Global oils & fats supply in CY22 should progressively improve. However, current supply tightness looks set to persist longer than earlier expected due to poor ongoing South American soyabean harvest which has flattened CY22 supply outlook somewhat. Consequently, we are nudging up our recently upgraded CPO price assumptions of RM3,800 for FY22 to RM4,000 per MT and from RM3,100 to RM3,500 for FY23. However, the stronger CPO price assumptions are offset by higher-than- expected fertiliser costs, notably potash and nitrogen. The latter is energy intensive in its production and LNG prices have been spiralling up of late. The Manufacturing arm is also set to face costlier CPO and PKO as inputs even though demand for fatty acids and fatty alcohols should stay healthy as they are used to produce toiletries and personal care products. Overall, FY22 EPS upgrade is negligible while FY23 EPS is upgraded by 3%.

Maintain OUTPERFORM and TP of RM30.00, based on FY22E PER of 16x (based on large cap peers). KLK is our preferred integrated pick given: (i) its FBMKLCI status, (ii) FFB boost from IJMP (iii) CPO prices staying elevated despite some easing expected from mid-CY22. Foreign shareholding levels. Based on our in-house ESG scoring, KLK ranks third with a score of 78%.

Key risks to our call are sharp decline in CPO prices and further significant rise in fertiliser/transportation costs due to rising energy cost.

Source: Kenanga Research - 17 Feb 2022

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