• Reiterate BUY, new SOP-based TP of MYR25.75 from MYR26.30, 15% upside with c.5% FY22F yield. Given our expectations of volatile CPO prices, we believe Kuala Lumpur Kepong should perform better, due to its integrated business model. With its share price having retreated, valuations look inexpensive now – it is trading at 14x FY23F P/E, ie the lowest among its big-cap peers, which are trading at 14-16x.

• CPO prices have fallen drastically due to the unwinding impact of Indonesia’s export ban, and recession fears which have pulled down commodity prices in general. We believe the price decline could have been slightly overdone, having fallen 44% in 7 weeks, much more than the declines in soybean, crude oil and wheat prices (-31%, -17% and -16%). Regulatory risks still exist – especially for Indonesian plantations – but we think that supply concerns will continue to haunt the sector for the rest of 2022, given the logistics backlog in Indonesia and the labour shortages in Malaysia. If these issues are resolved by end-2022, and Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should still be a better year for supply, and prices should remain under pressure.

• ESG concerns remain, but may have taken a back seat. However, the ESG discounts we had previously assigned to valuations are still prevalent. We reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvements. From our analysis, we highlight that while better disclosure on ESG-related information has been made over the years, progress in mitigating ESG issues is rather slow. As a result, we have made some upward revisions to the ESG scores for some companies that have made progress. We also highlight that some planters have remained relatively stagnant in their ESG efforts, while others have even cut down its disclosures.

• Lower CPO price assumptions now. We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which should providing support for CPO prices. We cut our 2022F CPO price estimate to MYR5,100/tonne, from MYR5,300/tonne. For 2023F, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could fall to lower levels. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. We lower our 2023 assumption to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne assumption for 2024 remains unchanged. As a result, we cut KLK’s FY22-24F earnings by 5-10%.

• Maintain BUY with a new TP of MYR25.75. Our SOP valuation is based on a 2023F P/E of 20x for KLK’s plantation business, and 12x for its manufacturing unit. Our TP has taken into account a 2% ESG discount, based on its current ESG score of 2.9, ie below the country median of 3.

Source: RHB Research - 11 Aug 2022