• Maintain BUY, with new TP of MYR34.15, from MYR31.45, 32% upside and c.5% FY22F (Sep) yield. Kuala Lumpur Kepong’s 1HFY22 results were above our and consensus estimates. We expect earnings to post a stronger recovery in 2HFY22, given the upliftment of the export ban in Indonesia, and the higher CPO price environment. The company remains the most inexpensive big-cap planter, trading at 15x 2023F, at the low-end of its big-cap peers of 15-17x.

• 1HFY22 core net profit slightly beat. KLK’s core net profit came in slightly above our and consensus FY22F, at 53-56% of our and consensus expectations. This was mainly contributed by higher-than- expected ASPs as well as stronger-than-expected downstream margins.

• KLK declared an interim DPS of 20 sen (1H21: 20 sen), in line with our FY22F expectations of 120 sen (or 55% net payout).

• 1HFY22 FFB production increased 26.8% YoY, while 7MFY22 output moderated slightly to +24.4% YoY – driven by the low base effect in FY21 and the IJMP consolidation. This is on track with management’s FFB growth guidance of +20% YoY for FY22 but below our 30% growth assumptions. We bring down our FFB growth assumptions for FY22 to 21.6% but keep our 5-7% growth forecasts for FY23-24.

• Unit costs rose. We estimate unit costs rose >20% QoQ and YoY in 1HFY22, on the back of rising fertiliser prices. This is in line with management’s expectations of a 20-25% YoY in FY09/22 to MYR2,100- 2,200/tonne from MYR1700-1,800/tonne in FY21. KLK has tendered for its fertiliser requirements for 1HFY22 (at prices 5-10% higher YoY), while 2HFY22 pricing should be at least 50% higher YoY.

• Downstream margins improved. The downstream segment saw a QoQ improvement in margins to 7.8% in 2QFY22 (from 5.2% in 1Q22), although 1HFY22 margins was lower YoY at 6.5% (from 7.3% in 1H21). KLK is still expecting sales volume to remain robust going forward, while utilisation rates remain high at 75-80%. Assuming management is able to achieve its more than 85% utilisation rate target in FY22, we believe its downstream margins would improve on better economies of scale.

• Our earnings are revised up by 8-14% after imputing our latest CPO price assumptions of MYR5,085/tonne for FY09/22 (from MYR4,350) and MYR4,550/tonne (from MYR3,775) for FY23.

• Maintain BUY, with a higher TP of MYR34.15, after rolling forward our valuation to 2023F, based on an unchanged 18x P/E for the plantation unit, 12x P/E for the manufacturing business, an 85% discount applied to the RNAV of its property landbank, and a 2% ESG discount given its score of 2.9. KLK remains the most inexpensive big-cap planter under our coverage, trading at 15x 2023F, at the low-end of its peer range of 15-17x.

Source: RHB Research - 25 May 2022