9MFY22 Core Net Profit (CNP) of RM1,576m came within our expectation, reaching 77% of Kenanga’s FY22F CNP but below consensus (at only 64% of FY22F PATMI). CPO price and fruit output rose YoY but CPO prices have eased since June though a fragile supply recovery should keep prices firm. Keeping FY22F Core EPS (CEPS) but trim FY23F CEPS by 5%. TP is revised down from RM30.00 to RM28.00 as FY22F CEPS makes way for FY23F’s. Maintain OUTPERFORM on strong management, defensive balance sheet, efficient operations and undemanding ratings.

Reported 9MFY22 PATMI/NP of RM1,704m which inched up only 4% YOY as last year’s NP included RM482m in divestment gains alone. Adjusting for these and other gains, 9MFY22 CNP of RM1,576m rose 64% YoY, which better reflects the strong underlying performance. 9MFY22 CNP managed to surpass FY21 CNP thanks to firmer CPO prices as well as contributions from IJM Plantations (IJMP) and 60% of Pinang Witmas Sejati which lifted FFB output 26% YoY to 3.586m MT. QoQ, 3QFY22 CNP grew by only 4% as Manufacturing PBT fell 45% due to refining and PK crushing losses. Otherwise, 3QFY22 Plantation PBT rose 40% QoQ on higher FFB output and CPO prices. End-June 2022 net gearing held steady QoQ at 53%.

Moving forward, Plantation earnings should ease as palm oil prices have dipped by >30% since June due to a combination of seasonal supply uptrend and aggressive selling as Indonesia faces storage limitations. However, despite seasonal supply improvement over the next few months, edible oils tightness is likely to ease only in 2023 and provided demand recovery is not stronger than 3-4% YoY. An economic slowdown or recession can dampen demand but we suspect buying should pick up as inventories among key buying countries are low. YTD, Chinese imports of palm oil have been subdued while elevated fossil fuel prices meant there is latent demand for biofuels. We are maintaining average CPO price of RM4,500/MT for FY22F and RM4,000/MT for FY23F but nudging down FY22F FFB production by 2%.

Downstream prospects are more mixed. While KLK Oleo should benefit from easier raw material prices, slower economic outlook is set to dampen demand and some of its European plants may face rising energy costs and possible supply disruptions. Note that Europe is home to a third of the Group’s 15 oleo & specialty chemical plants. However, 23% UK-based associate, Synthomer is doing better than anticipated so far. 1HFY22 earnings are still down YoY but this is to be expected after a record FY21 thanks to strong Covid-19 driven demand for its nitrile products. Importantly, despite lower YoY earnings, we are edging up FY22F performance a little following Synthomer’s success in hiking selling prices to pass through rising costs coupled with the acquisition of adhesive resin business from Eastman Chemical Company in April 2022.

Full RSPO push. All of KLK’s palm oil mills, Malaysian estates and 90% of its Indonesian estates have been RSPO certified before the acquisition of IJMP. Although IJMP’s estates are either MSPO or ISPO certified, KLK aims to achieve RSPO recognition as well as MSPO or ISPO certification by 2023-24.

Maintain OUTPERFORM but trim our TP to RM28.00 from RM30.00 as we replace FY22F CEPS with FY23F CEPS. 16x target PER is maintained which imputes in a 5% premium to historic integrated ratings in view of the Group’s good 4-star ESG score (ie 15 x FY23F CEPS x 5% ESG premium). Besides continuously strengthening its ESG stance, KLK also offers defensive asset rich NTA, decent gearing and an efficient upstream operation which allows for better cost management and the flexibility to expand further when the opportunities arise.

Source: Kenanga Research - 18 Aug 2022