Review

• KLK’s 3QFY23 results came in below expectations. Excluding forex impact and other non-core items, KLK’s 3QFY23 core net decreased 79.8% YoY to RM110.1mn on the back of a 26.5% drop in revenue. Both upstream and downstream segments reported lower profits compared to last year.

• Cumulatively, 9MFY23 core net earnings decreased by 44.4% YoY to RM876.7mn.

• Plantation: Despite higher FFB and CPO production, 9MFY23 operating profit plunged 54.0% YoY to RM749.1mn, mainly dragged by lower average selling prices of CPO (-15.9% YoY to RM3,698/tonne) and PK (-44.1% YoY to RM1,877/tonne) as well as higher production cost.

• Manufacturing: 9MFY23 operating profit decreased 49.9% YoY to RM468.6mn, mainly due to lower profit contribution from the Oleochemical division, which was partially mitigated by higher profit from the refineries and kernel crushing operations.

• Property: This segment recorded a lower operating profit of RM43.8mn (-13.3% YoY) in 9MFY23 despite a 2.5% growth in revenue. The lower profit was mainly due to recognition of development profits from a newly launched phase with lower gross margin.

• No dividends were declared for the quarter under review.

Impact

• However, we cut FY23 earnings forecast by 18.3% after factoring in lower contributions from the manufacturing division and associates as well as higher production costs. However, FY24 and FY25 earnings have been revised up by 2.3% and 1.6%, respectively, as we see better yield and CPO production going forward.

Outlook

• Management expects FY23 to be a challenging year with the current palm oil market appears to remain uncertain.

• Management expects CPO price to stay at the current level of RM3,800/tonne for the rest of the year.

• As for the manufacturing segment, demand in Europe will remain dampened in coming quarters while the Asian market recovery is expected to be slightly ahead.

Acquires 33% of Boustead Plantations

• On a separate note, KLK announced that the group has entered into a strategic collaboration agreement (SCA) with Boustead Holdings Bhd (BHB) and Lembaga Tabung Angkatan Tentera (LTAT) to acquire 739.2mn shares or 33% and one share in Boustead Plantations Bhd (BPlant) for a total of RM1.15bn or RM1.55/share and plans to take the company private via a mandatory general offer (MGO) together with BHB and LTAT (which collectively owned 35% post the exercise). The proposed acquisition is not subject to KLK’s shareholders’ approval, and is expected to be completed by 4QCY23.

• The offer price of RM1.55/share implies an acquisition EV/ha of RM56k for BPlant, which we deem fair against plantation companies of similar market cap. Besides, the offer price also translates into an acquisition P/B of 1.2x, which is comparable to the industry’s peers as well. The acquisition will enhance KLK’s planted landbank by 25% to around 362k ha.

• Funding is not an issue for KLK as the group had RM2.8bn cash pile as of 30 June 2023 with a net gearing stood at 0.5x. If KLK manages to acquire the remaining stake in BPlant, it will become 65.0%-owned subsidiary of KLK.

• Assuming 80% debt financing and 20% from internal funds, our back-of-theenvelope calculation reveals that the acquisition would increase KLK’s net gearing to 0.6x, which is still manageable, in our view.

• However, the acquisition is not going to be earnings accretive in the shortterm after factoring in the finance cost and based on BPlant’s aging oil palm age profile with 46% past prime trees at its planted area.

Valuation

• We maintain KLK as SELL with a higher TP of RM21.28 (previously RM20.84), post the earnings adjustment and based on CY24 PER of 18x.

Source: TA Research - 25 Aug 2023