KLK’s 9MFY23 results met our expectations but disappointed the market slightly. While its 3QFY23 upstream and downstream plantation earnings remained subdued, easier cost and firmer CPO price are within sight going forward offset by its proposed acquisition of BPLANT which is initially slightly earnings dilutive. We maintain our forecasts, TP of RM24.50 and OUTPERFORM call.

Its 9MFY23 core net profit came in within our expectations at 69% of our full-year forecast but disappointed the market at only 60% of the full-year consensus estimate. Its 9MFY23 core net profit fell 44% YoY, dampened by: (i) £126m (c.RM170m at KLK) of goodwill write-down in 2QFY23 by 27%-associate Synthomer for its newly acquired adhesive unit, (ii) RM76m of forex loss, (iii) RM49m of disposal gains, and (iv) RM38m of fair value gains. On CNP basis, its 9MFY23 CNP stood at RM877m, weaker by 44% YoY due to a softer 3QFY23. FFB output of 1.171m MT in 3QFY23 was slightly weaker than expected QoQ and YoY. Likewise, 3QFY23 CPO price was also marginally weaker while downstream segment’s refining and oleo-chemicals units suffered further weakness QoQ. Nonetheless, net gearing still edged down from 48% in March to 47% in June 2023.

Earnings may recover in FY24. Worldwide edible oil supply and demand are recovering almost in tandem, hence no big supply surpluses are expected until mid-2024. Therefore, we are firming our CPO price forecast from RM3,700 per MT to RM3,800 for FY23-24. Meanwhile, production cost should ease as fertiliser and, to a lesser extent, fuel costs have trended lower. Wage rise is stickier on higher minimum wages in Malaysia and Indonesia but upward pressure should ease as well given the moderating general inflation. Downstream margins should hold better as de-stocking pressure eases to some degree.

MGO for Boustead Plantation (BPLANT). Under a strategic collaboration with Boustead Holdings Bhd (BHB) and Lembaga Tabung Angkatan Tentera (LTAT), KLK plans to buy a 33% stake in BLANT from BHB for RM1,146m or RM1.55 per share. After the sale, BHB and LTAT would still collectively own 35% hence all three parties will jointly extend a Mandatory General Offer for the rest of BPLANT shares at RM1.55 per share. While valuation of 1.3x P/NTA and RM56K per planted Ha is reasonable, high borrowing costs will drag KLK’s FY24- 25F earnings down by 4-6% but earnings enhancement could come from FY25 onwards as BPLANT’s productivity picks up.

Forecast. Despite nudging up CPO prices slightly, the proposal to buy into BPLANT is expected to cost KLK RM100-RM120m in additional interest expense, hence we are keeping FY23-24F net profit forecasts. With net gearing expected to rise from under 50% to 55%-60% after buying into BPLANT, full-year NDPS is toned down from 50.0 sen to 40.0 sen.

Maintain OUTPERFORM, FY23-24F CNP along with TP of RM24.50 which is based on 15x FY24F PER and in-line with the historical rating for integrated players, and at a 5% premium for its 4-star ESG rating. Given its good track record, defensive balance sheet and expansionary mode, KLK remains our sector pick.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 25 Aug 2023