Kenanga Research & Investment

Kuala Lumpur Kepong - Within Expectations

Publish date: Wed, 25 May 2022, 09:43 AM

2QFY22 Core Net Profit (CNP) of RM526 (+4% QoQ, +80% YoY) was a little weaker than expected due to larger-than- usual paper loss of RM85m on derivatives but still good overall. FFB output was softer QoQ but stronger YoY thanks to the acquisition IJM Plantation. Overall, 1HFY22 CNP of RM1,031m (+82% YoY) came in 3% above our expectation but 5% below consensus on strong palm oil prices as well as FFB production. Whilst CPO prices look toppish and should ease on seasonal improvement in production, prices are still likely to stay firm. We are nudging up FY22E/FY23E Core EPS by 3%/10% on the back of higher CPO price assumptions of RM4,500/RM4,000 per MT. KLK announced an interim 1HFY22 dividend of 20.0 sen which is same amount as a year ago. We are maintaining our TP of RM30.00 and OUTPERFORM recommendation.

Within expectations. Underpinning the strong 2QFY22 CNP was strong CPO prices of RM4,378/MT (+8% QoQ, +46% YoY). FFB output declined seasonally by 12% QoQ to 1.111m MT but still better by 23% YoY thanks to the acquisitions of 95% stake in IJM Plantations (IJMP) and 60% of Pinang Witmas Sejati (PWS) early in FY22. On a YTD 1HFY22 basis, CPO price was also firmer at RM4,207/MT (+48% YoY) while fruit output rose 27% YoY to 2.377m MT. An interim dividend of 20.0 sen was declared for this first half, in line with last year’s interim 1H dividend. Net gearing doubled from a year ago to 53% on the acquisitions of IJMP and PWS but is expected to start tapering moving forward.

Outlook: The second half of this calendar year should see an improvement in supply from both palm and soyabean oils. This will be much welcomed by the tight edible oils market but will mean downward pressure on palm oil prices. However, we expect CPO prices to stay elevated as price downside is moderated by several supportive factors:

a) A tight international edible oils and fats market which is not likely to recover significantly until CY23 despite prospects of more palm and soyabean oil supply in 2H CY22.

b) China, a big user of palm oil, has yet to fully restart its economy from Covid-19. Higher demand can be expected as the country gradually heads back to normalized economic activities.

c) Current high energy prices also meant a strong latent demand for biofuels in that if vegetable oil prices fall too steeply, the price disparity will prompt more demand for biodiesel.

CPO prices for KLK should average at RM4,500/MT for FY22 (up from RM4,000/MT previously) and RM4,000/MT for FY23 compared to our old estimate of RM3,500/MT. Earnings would have been higher if not for 55% of the Group’s matured estates being in Indonesia where higher exports levy and duties add to the cost. Despite this handicap, we believe KLK’s Indonesian upstream operation is almost as profitable on per Ha basis due to higher productivity.

Maintaining our OUTPERFORM as well as our TP of RM30.00. As KLK’s FY ends at September, our TP is based on the average FY22-23 EPS at 16x PER. However, we are currently monitoring KLK closely for possibility of higher ratings due to its defensive land rich balance sheet, decent gearing and a key beneficiary of current food inflation as edible oils and fats prices have risen substantially compared to a year ago. A larger-than-expected dividend should not be ruled out either.

Source: Kenanga Research - 25 May 2022

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