Review

• KLK’s 4QFY23 results came in below expectations. Excluding forex impact and other non-core items, KLK’s 4QFY23 core profit decreased 74.6% YoY to RM113.9mn on the back of a 17.2% drop in revenue. Both upstream and downstream segments reported lower profits compared to last year.

• Cumulatively, FY23 core net earnings plunged 51.1% YoY to RM990.6mn. The core profit accounted for 86% and 82% of ours and consensus’ fullyear estimates. The weak results were mainly due to lower-than-expected palm oil prices.

• Plantation: Despite higher FFB and CPO productions, FY23 operating profit plunged 45.6% YoY to RM1,166.8mn, mainly dragged by lower average selling prices of CPO (-13.9% YoY to RM3,639/tonne) and PK (- 38.1% YoY to RM1,841/tonne) as well as higher production costs.

• Manufacturing: FY23 operating profit plunged 63.9% YoY to RM391.9mn, mainly due to lower profit contribution from the Oleochemical division, which partially mitigated by higher profit from the refineries and kernel crushing operations.

• Property: This segment also recorded a lower operating profit of RM57.4mn (-11.4% YoY) in FY23. The lower profit was mainly due to unfavourable earnings mix from a newly launched phase with lower gross margin.

• No dividends were declared for the quarter under review. However, the management mentioned that the payment of a final dividend will be recommended at a later date.

Impact

• We tweak FY24 and FY25 earnings higher by 0.7% and 1.9%, respectively, after updating FY23 figures.

Outlook

• Management is cautiously optimistic about FY24 outlook amid a high interest environment as well as geopolitical conflicts, which could weigh heavily on the global economy.

• The increase in global oilseed production in 2024 on larger soybean and sunflower seed could potentially pose a downside risk to CPO prices.

• Meanwhile, the development of an El-Nino event will likely continue until at least early-2024, with a subsequent weakening thereafter. We believe El-Nino has a positive impact on CPO prices as the event is deemed as being a strong market sentiment issue. However, the weather impact may be offset by an easing labour crunch and result in efficiency in crop recovery.

• As for the manufacturing segment, management expects the prevailing macroeconomic condition to continue to pose significant challenges to this division. However, the group still anticipates recovery and modest improvements in FY24.

Valuation

• We maintain KLK as SELL with a higher TP of RM21.50 (previously RM21.28), post the earnings adjustment and based on CY24 PER of 18x.

Source: TA Research - 23 Nov 2023