• Maintain BUY, with new SOP-derived TP of MYR27.85 from MYR26.75, 32% upside with c.5% FY23F (Sep) yield. Kuala Lumpur Kepong’s FY22 results were in line with our, but below consensus estimates. We expect FY23 earnings to decline YoY due to lower ASPs but valuation is already reflecting the lower earnings – the stock remains the most inexpensive big- cap planter, trading at 12x 2023F P/E, the lowest among its big-cap peers, which are trading at 12-16x P/E.

• FY22 core net profit was in line with our but below consensus at 101% and 94% of FY22. KLK did not declare a final DPS for 4Q22 yet, but we expect final DPS to be around 100 sen, bringing FY20 DPS to 120 sen, reflecting a net payout (ex-EI) of 55%, or yield of 5.7%.

• FY22 FFB production increased 29.7% YoY, higher than management’s FFB growth guidance of +20% YoY and our 25% growth assumption. So far in 1MFY23, KLK’s FFB growth remains strong at +15.9% YoY. However, we expect this to moderate in 2HFY23. We keep our 4-5% growth forecasts for FY23F-25F.

• Plantation EBIT margin fell to 28.5% in 4Q22 from 37.9% in 3Q22, bringing FY22 margins to 35.2% (up from 16.2% in FY21). The stronger FY22 margin came from the strong FFB output and higher ASPs, but was offset by higher fertiliser costs. Management previously estimated FY22 production unit cost at c.MYR2,000/tonne (from MYR1,700-1,800/tonne in FY21) as the increase in fertiliser costs (30-35% in FY22) would not be reflected fully in FY22 – since the prices of fertilisers tendered for 1H22 were manageable.

• Downstream EBIT margin fell QoQ and YoY. The downstream segment saw a QoQ drop in margins to 3.5% in 4QFY22 (from 4.5% in 3QFY22) bringing its FY22 margins to 5.2% (from 7% in FY21). 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 as well as lower margin gap caused by the tax levy holiday in 4Q22. Going forward, we expect this division to post better margins in FY23F, as the levy holiday has ended and downstream margins in Indonesia should recover. We believe KLK may still have high inventory build-up in Indonesia in 4QFY22 which would be disposed in FY23F.

• Our FY23F-24F earnings are tweaked by -5 to 2% after adjusting for FY22 earnings and we introduce FY25F earnings.

• Maintain BUY, with a higher TP of MYR27.85 (from 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, a 90% 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 12x 2023F, at the low-end of its peer range of 12-16x.

Source: RHB Research - 24 Nov 2022