• Keep BUY, with new TP of MYR27.50 from MYR25.80, 28% upside and c.4 FY24F (Sep) yield. FY23 results beat expectations, with lower-thanexpected unit costs and improved downstream margins. Kuala Lumpur Kepong should see stronger FY24F earnings as costs will likely moderate further, while FFB output is expected to recover strongly, as weather conditions remain conducive. KLK remains the most inexpensive big-cap planter – trading at 15.5x 2024F P/E, at the lower end of its big-cap peer range of 15-20x P/E.

• FY23 core net profit came in above our and consensus estimates, at 107% and 115% FY23F. Despite the weaker-than-expected FFB output, KLK managed to record lower-than-expected unit costs and improved downstream margins (albeit still negative in 4QFY23), bringing 4QFY23 core profit to a growth of 115% QoQ. KLK has yet to declare its final DPS for FY23, which we estimate at 50 sen, or a payout of 53%.

• FY23 FFB production rose 5.2% YoY, lower vs KLK’s guidance of 18% YoY and our 8.4% YoY forecast for FY23. KLK is guiding for FFB growth of 14% for FY24 as it expects a continued recovery in output in Indonesia. To be conservative, we raise our FFB growth forecast to 8% (from 5%) for FY24 and keep our +3-5% for FY25F-26F.

• Plantation EBIT margin rose to 28.5% in 4QFY23 (from 12.9% in 3Q), bringing FY23 margins to 24.2% (35.2% in FY22). The stronger QoQ margin was from stronger FFB output (+28% QoQ), offset slightly by lower ASP (-4%). Management estimates FY23 production unit cost at c.MYR2,230/tonne (+17% YoY from MYR1,900/tonne in FY22). KLK managed to apply almost all its fertiliser requirements in FY23. Going forward, management expects unit costs to decline by approximately 10- 15% in FY24 to MYR1,900/tonne, on the back of lower fertiliser prices. We adjust down our cost assumptions accordingly.

• Downstream EBIT margin rose QoQ. The downstream segment recorded a QoQ rise in margin to -0.1% in 4QFY23 (from -0.8% in 3QFY23), bringing FY23 margin to 2.3% (from 5.2% in FY22). This could indicate that the worst is over for the downstream division, particularly given lower energy costs and its recent reduction of oleo capacity in Europe. KLK is guiding for modest improvements in this division in FY24, in line with our forecasts.

• We raise FY24F-25F earnings by 4-10% after adjusting for higher FFB output and lower unit costs as well as lower FY24F-25F consensus earnings for its associate, Synthomer PLC.

• Maintain BUY, with a higher TP of MYR27.50 based on an unchanged SOP valuation, which comprises: 20x 2024F P/E for the plantation unit, 18x 2024F P/E for the manufacturing business, a 90% discount applied to the RNAV of its property landbank, and 0% ESG premium/discount to reflect its score of 3.0. KLK remains the most inexpensive big-cap planter under our coverage – trading at 15.5x 2024F, at the low-end of its peer range of 15- 20x.

Source: RHB Securities Research - 23 Nov 2023