KLK’s full-year FY23 results came within market expectation but below our estimate. Upstream earnings recovered strongly in 4QFY23 on flat CPO price, higher FFB output and lower cost but downstream continued to face headwinds. This trend is expected to continue into FY24-25. We tone down FY24F CEPS slightly by 6%, and introduce FY25F CEPS. TP is maintained at RM24.50 as our FY24F downgrade is largely offset by our revised sector rating of 16x PER instead of 15x. Maintain OUTPERFORM.

FY23 core net profit (CNP) came in 12% below Kenanga’s, but within market’s, expectation. FY23 CNP fell 43% YoY as lower CPO price and high costs dampened upstream earnings while downstream refining margins tightened on stiff competition and oleo-chemicals faced demand challenges. Key variance between our CNP and reported PATMI are: (i) GBP126m (c.RM170m at KLK) of goodwill write-down in 2QFY23 by 27%-associate Synthomer for its newly acquired adhesive unit, (ii) RM159m of forex loss, (iii) RM128m of disposal gains, (iv) RM68m of fair value gains, (v) RM71m of oleochemical restructuring, and (vi) RM61m of provision against collection on IJM plasma cost. Net gearing nudged up from 47% in 3QFY23 to 52% as of end Sept 2023 on ongoing replanting, acquisition of Temix Oleo and interim dividend payment. As was the practice over the past 3-4 years, a final dividend will be declared about a month later.

Better FY24 earnings expected. The global edible oil supply and demand balance is still expected to stay tight in 2024 (potentially till mid-2025) as supply looks uncertain depending on weather development while demand is reverting back to longer term growth of 3%-4% YoY after being disrupted for 2-3 years by the pandemic. Relatively firm CPO price of RM3,800 per MT is expected for KLK over FY24 and FY25. Production cost should ease as fertiliser and to a lesser extent fuel costs have trended lower. Downstream margins are expected to stay weak but steadier than FY23 on easing de-stocking pressure but with competition staying intense.

Forecast. We are toning down FY24F CEPS slightly by 6% to 147.0 sen and introducing our FY25F CEPS of 165.1 sen. Forward margins are expected to inch up on easier YoY fertiliser and energy costs even though their prices are still not low by historical measure. PKO price downtrend has started slowing and is expected to stabilise over FY24. Upstream productivity in Malaysia has also normalised with shortages of labour easing. Net gearing is expected to stay manageable if not moderate further. We continue to expect NDPS of 50.0 sen over FY24- 25.

Maintain OUTPERFORM, along with TP of RM24.50 which is based on updated past 6-month sector PER of 16x against FY24F CEPS. A 5% premium for its 4-star ESG rating is also imputed into the TP. 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 - 23 Nov 2023