• Stay BUY, SOP-based TP drops to MYR25.80 from MYR27.25, 14% upside with c.3% FY24F (Sep) yield. Kuala Lumpur Kepong’s 1QFY24 earnings came in below expectations on lower FFB output and manufacturing margins. Earnings should improve going forward from improved FFB output and lower fertiliser costs, albeit offset somewhat by weak downstream earnings. Its valuation remains attractive, at 18.7x 2024F P/E vs the big-cap peer range of 18-20x P/E.

• 1QFY24 core net profit came in below our and consensus estimates, at 14% and 16% of our and consensus FY24F earnings. This was mainly due to lower- than-expected FFB growth, as well as narrower-than-expected margins from the manufacturing segment.

• 1QFY24 FFB production rose 6.2% YoY, underperforming against KLK’s guidance of 14% YoY and our 9% YoY forecast for FY24. KLK continues to guide for FFB growth of 14% YoY for FY24, as it expects a continued recovery in output in 2HFY24. To be conservative, we trim our FFB growth forecast to 7% (from 9%) for FY24, and keep our FY25-26F estimate at 5-6%.

• Plantation EBIT margin fell to 26.8% in 1QFY24, from 28.5% in 4QFY23 and 29.5% in 1QFY23. The YoY decrease stemmed from a lower CPO ASP (-7%), offset slightly by stronger FFB output (+6%). Management estimates FY24 production unit cost at below MYR2,000/tonne (c.10-15% down YoY), on the back of higher FFB production as well as a reduction in fertiliser costs. KLK's tender for fertiliser for 1HFY24 was 20-30% lower YoY. We have projected a similar 10-15% decline in YoY costs for FY24F.

• Downstream EBIT margin rose QoQ. The downstream segment recorded a QoQ rise in margin to +1.3% in 1QFY24 (from -0.1% in 4QFY23). 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. We tone down our manufacturing margin assumptions slightly, to be conservative – to 1.6% in FY24 (from 2%), but keep our 2.5-3.5% forecasts for FY25-26F.

• We lower FY24-26F earnings by 2-6% after adjusting for lower FFB output and leaner manufacturing margins.

• Maintain BUY, with a lower TP of MYR25.80 (from MYR27.25) 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 70% discount applied to the RNAV of its property landbank, and 0% ESG premium/discount applied to reflect its score of 3.0 (on par with the country median). KLK remains the most inexpensive big-cap planter under our coverage – trading at 18.7x 2024F, at the low-end of its peer range of 18-20x.

Source: RHB Research - 21 Feb 2024