• Stay BUY, with new SOP-based MYR24.70 TP from MYR25.80, 10% upside and 2% FY24F (Sep) yield. Kuala Lumpur Kepong’s 1HFY24 earnings disappointed, dragged by higher associate losses and effective tax rates. Earnings should improve in 2HFY24F from stronger FFB output and downstream earnings, while its associate profits seem to be turning the corner. Valuation remains attractive, at 20.7x FY25F P/E vs its big-cap peer range of 20-25x.

• 1HFY24 core net profit came in below our and consensus estimates, at 29- 30% of our and consensus FY24F. This was mainly due to unexpected associate losses of MYR84m (most of which were caused by losses at Synthomer), lower-than-expected investment income and higher-than- expected effective tax rate of 30% in 1HFY24 (vs our 22% forecast). KLK declared an interim DPS of 20 sen in 2QFY24 (2QFY23: 20 sen).

• 2QFY24 FFB production rose 8.3% YoY, bringing 1HFY24 FFB output growth to 7.2% YoY underperforming against KLK’s guidance of 14% YoY, but in line with our 7% YoY forecast for FY24. KLK continues to guide for FFB growth of 14%YoY for FY24, as it expects a more marked recovery in output in 2HFY24. To be conservative, we make no changes to our FFB growth forecasts of 7% for FY24 and 5-6% for FY25-26.

• Plantation EBIT margin was flattish QoQ and YoY at 26.7% in 2QFY24 and 1HFY24 with estimated unit costs of MYR2,200/tonne in 1HFY24. KLK expects FY24 unit cost to moderate to c.MYR2,000/tonne (c.10-15% down YoY), on the back of higher FFB production as well as a reduction in fertiliser costs. Its tender for fertiliser for FY24 was 15-20% 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 +1.9% in 1QFY24 (from 1.3% in 1QFY23). Although the oleochemical segment is still loss making in Europe, there has been an uptick in sales volumes, while lower energy costs and its recent reduction of oleo capacity in Europe should result in continued improvements in the coming quarters. We make no changes to our manufacturing margin assumptions of 1.6% in FY24 and 2.5-3.5% forecasts for FY25-26.

• We lower FY24F-26F earnings by 12-22% after adjusting for higher associate losses, lower investment income and higher effective tax rates. Synthomer’s profits are expected to improve in 2HFY24F given the lower net debt (post rights-issue) and streamlining of operations.

• Maintain BUY, with a lower TP of MYR24.70 (from MYR25.80) based on an SOP valuation and includes 0% ESG premium/discount. We lower our property division RNAV discount to 60% (from 70%) to be in line with the current market value, while keeping all other parameters unchanged.

Source: RHB Research - 21 May 2024