• Stay BUY, unchanged SOP-based TP of MYR25.80 offers 12% upside with c.3% FY24F (Sep) yield. We believe accusations of unethical recruitment practices in Nepal do not reflect a problem with Kuala Lumpur Kepong – more likely due to human error, as are a lot of such cases. The counter is trading at a fair 19x 2024F P/E vs the big-cap peer range of 18-20x.

• To address allegations of "unethical recruitment" involving 140 Nepalese workers, KLK appointed an independent third party (a Big-4 consulting firm) to investigate this matter further and provide the necessary recommendations. The allegation was in relation to SOS Manpower Service’s (SOS) sub-agents collecting recruitment fees for the 140 workers. SOS is an appointed agent recruiting foreign workers from Nepal for KL-Kepong Rubber Products, through its Malaysian agent Agensi Perkerjaan Ukhwah. KLK is hoping to receive the report on the investigation from the third party soon, and resolve the issue by the end of May. Depending on the findings, it may have to review its partnerships and possibly terminate its business relationship with said agents. If all issues are cleared, KLK could still bring in the 140 workers to Malaysia before end-May, which is the government deadline for all foreign worker quotas to be utilised.

• KLK introduced the Zero Statutory Recruitment Cost practice in 2018 and further enhanced the policy four years later by reimbursing the recruitment fees for existing workers in 2022. This was followed by another round of reimbursements in 2024. In total, reimbursements were made to 4,462 workers, costing roughly MYR7-10m.

• Further on the ESG front, KLK is focusing on four main aspects on complying with EU Deforestation Regulation or EUDR, which is due to be implemented in Dec 2024. These aspects include segregating the supply chain, expanding the supply chain to procure more palm kernel oil, enhancing the interface for a better documentation system, and appointing a third- party verifier to ensure the mapping vs satellite imagery is accurate.

• We make no changes to our estimates. While this negative news flow will affect sentiment, we believe it is likely to be short-lived. We believe that, with KLK addressing the issues head on and publicly, it should help avoid further escalation. To that end, RAM Ratings has already issued a statement saying that KLK’s credit and sustainability ratings are intact.

• Maintain BUY and TP of MYR25.80. Our SOP-based TP 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.

Source: RHB Research - 7 May 2024