• BUY, new TP of MYR26.30 from MYR34.15, 15% upside with c.5% FY22F (Sep) yield. Despite the lower CPO price environment at present, Kuala Lumpur Kepong’s valuations remain undemanding. It is trading at 13x 2023F P/E, at the low-end of its big-cap peer range of 12-15x.

• 20% FFB growth target for FY22. Despite facing a 20% labour shortage, KLK expects to be able to achieve a FY22F FFB growth of 20% (YTD-April: 24%). This would be supported by the arrival of foreign workers – with the first batch of a few hundred workers to arrive in 6-8 weeks.

• More forward sales done in Malaysia. About 60% of KLK’s Malaysian production has been sold three months forward, while Indonesian sales are mostly sold on spot. In Indonesia, it had issues finding the right mechanism to sell its palm oil domestically in order to obtain export permits. However, with the new ruling where planters can pay an additional USD200 tax per tonne to get a Domestic Market Obligation (DMO) exemption, KLK has managed to get an export permit for about one month of volumes so far.

• Unit cost in 1HFY22 has risen 10-15% YoY to c.MYR2,000 and is expected to remain at these levels for the rest of FY22. Management expects a 30-35% YoY increase in FY22 fertiliser costs, while the minimum wage hike would impact FY22 earnings by 5%. The full effect of higher fertiliser prices and higher minimum wages will only be felt in FY23, and we have imputed a further 50% increase in fertiliser costs into our projections.

• KLK's new Indonesian MYR700m integrated complex is coming onstream in stages – with the refinery up by end-2022, and the rest by early 2023. In 1Q22, KLK reclassified its refinery into the downstream division (from the plantations segment), resulting in downstream margins rising to 7.8% (from 5.2% in 1Q22) in 2Q22. The utilisation rate at its Indonesian refineries has fallen below 50% in 3Q22, due to DMO policies, while margins are minimal. While its Malaysian refinery and oleo margins should remain robust, Indonesian refinery margins may take time to recover – given the export ban in 3Q.

• KLK’s new nitrile glove plant is up and running, with the first line commissioned in May. By end-2022, the first phase (seven lines) will be completed, with a 2bn pa capacity. Utilisation is still low as KLK is currently only selling small amounts to household glove customers. It expects losses to be incurred in the first year of operations, but this is not expected to be significant. We have imputed this into our earnings estimates.

• We cut FY22-23F earnings by 1-7% and raise our FY24 projection by 14%, after taking into account the new Indonesian downstream capacity, the classification of refinery earnings, and the new nitrile glove plant.

• Maintain BUY, with a lower SOP-based TP of MYR26.30 (from MYR34.15), after adjusting for the earnings reclassification. Our TP includes a 2% ESG discount, given KLK’s ESG score of 2.9.

Source: RHB Research - 24 Jun 2022