• Stay BUY, with new SOP-based MYR25.40 TP from MYR26.20, 20% upside and c.2% FY24F (Sep) yield. Kuala Lumpur Kepong’s 9MFY24 earnings came in within our, but below consensus estimates. We expect earnings to improve further in 4QFY24F, as output should peak, while costs moderate. Valuation remains attractive, at 20.8x 2025F P/E vs its big-cap peer range of 18-35x.

• 9MFY24 core net profit came in within our but below consensus estimates, at 74% and 61% of FY24F, as 3QFY24 core net profit rose 82% QoQ.

• 3QFY24 FFB production was flattish QoQ, but rose 9.5% YoY, bringing 9MFY24 FFB output growth to 7.9% YoY. This is below KLK’s original guidance of 14% YoY, but in line with our 7% YoY forecast for FY24. KLK is now guiding for a lower 10% YoY FFB growth for FY24. 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 at 26.4% in 3QFY24, bringing 9MFY24 EBIT margin to 26.6% (up from 22.6% in 9MFY23). Despite flattish QoQ output in 3QFY24, KLK recorded a 4% reduction in unit costs to MYR2,280/tonne, bringing 9MFY24 unit costs to MYR2,230/tonne (-7% YoY), on the back of lower fertiliser costs (-15-20% YoY). We understand fertiliser application is on track and KLK still expects to end FY24 with unit cost moderating to c.MYR2,000/tonne (c.10-15% down YoY). We have projected a similar 10-15% decline in YoY costs for FY24F.

• Downstream EBIT margin fell QoQ to +1.3% in 3QFY24 (from 1.9% in 2QFY24), coming from higher losses recorded by the refineries and kernel crushing operations but offset by higher oleochemical contribution. This brought 9MFY24 downstream EBIT margin to 1.5% (from 3.1% in 9MFY23). The oleochemical subsegment is now poised to perform better YoY, bolstered by operational improvements and realisation of strategic initiatives in Europe and stronger demand and margins. However, the refinery subsegment will remain a drag, given the oversupply in the market and competition from Indonesia. Our downstream margin assumption is unchanged at 1.6% for FY24.

• We tweak earnings slightly by less than 1%, after updating our forex assumptions.

• Maintain BUY, with a lower SOP-based TP of MYR25.40 (from MYR26.20), after updating the market value of its listed associates and latest net debt. Our TP includes a 4% ESG premium. KLK’s valuation of 20.8x 2025F is attractive vs its peer range of 18-35x.

Source: RHB Research - 20 Aug 2024