• Maintain BUY, new TP of MYR26.75, from MYR25.75, 16% upside with c.5% FY22F (Sep) yield. Kuala Lumpur Kepong’s 9MFY22 results are above our and consensus estimates. We expect KLK to record improvements in sales volumes in 4Q, due to the upliftment of the export ban in Indonesia and inventory normalisation. The company remains the most inexpensive big-cap planter – the stock is trading at 11x 2023F P/E, the lowest among its big-cap peers, which are trading at 14-16x P/E.

• 9MFY22 core net profit exceeds expectations. KLK’s core net profit came in above estimates, at 78-86% of our and consensus full-year projections. This was mainly contributed by higher-than-expected FFB growth which led to lower-than-expected unit costs, as well as higher- than-expected PK prices and property division earnings.

• 9MFY22 FFB production increased 26.28% YoY, This is higher than management’s FFB growth guidance of +20% YoY and our 22% growth assumption. We lift our FFB growth assumption for FY22 to 24.6%, but keep our 5-6% growth forecasts for FY23-24.

• Unit costs likely fell YoY. Despite rising fertiliser prices, we believe estimated unit costs fell YoY in 9MFY22, given the YoY decline in plantation division revenue of 37% vs the YoY rise in EBIT of 63%. This could be attributed to the strong FFB output as well as lower-than-normal fertilisation activities. Management estimates FY22 production unit cost to remain at c.MYR2,000/tonne (from MYR1700-1,800/tonne in FY21) as the increase in fertiliser costs (30-35% in FY22) will not be reflected fully in FY22 – since the prices of fertilisers tendered for 1H22 were manageable.

• Downstream margins fell. The downstream segment saw a QoQ drop in margins to 5.4% in 3QFY22 (from 7.8% in 2QFY22) bringing its 9MFY22 margins to 5.8% (from 7.4% in 1H22). This is likely due to lower utilisation rate of its Indonesian refineries in 3Q22 as a result of Domestic Market Obligation (DMO) policies and the export ban. Going forward, we expect this division to post better margins, post-lifting of the ban and as the DMO policy is no longer applicable. We also expect to see some inventory build- up in Indonesia in 3QFY22 being disposed in 4QFY22.

• Our FY22-24F earnings are revised up by 1-10% after imputing higher FFB output, higher property division earnings and lower unit costs.

• Maintain BUY, with a higher TP of MYR26.75 based on an unchanged SOP valuation, comprising 20x 2023F P/E for the plantation unit, 12x 2023F P/E for the manufacturing business, an 85% discount applied to the RNAV of its property landbank, and a 2% ESG discount given its score of 2.9. KLK remains the most inexpensive big-cap planter under our coverage – trading at 11x 2023F, at the low-end of its peer range of 14- 16x.

Source: RHB Research - 18 Aug 2022