We maintain HOLD on KL Kepong with a higher fair value of RM22.90/share vs. RM22.20/share previously. Our fair value of RM22.90/share is now based on a rolled-forward FY24F PE of 18x, in line with the 5-year mean of large-cap planters. We ascribe a 3-star ESG rating to KLK.
KLK’s annualised 1HFY23 core net profit was 14% below our forecast and 33% below consensus estimates. The group’s results fell short of our expectations as 26%- owned Synthomer PLC recorded a loss. We have reduced KLK’s FY23E net profit by 14% to account for this.
KLK’s share of net loss in Synthomer was RM161.1mil in 1HFY23 vs. a positive RM28.6mil in 1HFY22. Synthomer was hit by impairment losses, amortisation of intangibles, restructuring and site closure costs in 2QFY23.
KLK’s core net profit (ex-disposal gain of RM41.9mil) fell by 48.3% YoY to RM592mil in 1HFY23 due to lower palm product prices, a decline in manufacturing earnings and losses at Synthomer.
Plantation EBIT shrank by 39.6% YoY to RM623.9mil in 1HFY23 from RM1bil in 1HFY22. Average CPO price realised was RM3,732/tonne in 1HFY23, 11.3% weaker than RM4,207/tonne achieved in 1HFY22. Average palm kernel price slid to RM1,910/tonne in 1HFY23 from RM3,352/tonne in 1HFY22.
On a positive note, KLK’s FFB production growth was healthy at 8.9% YoY in 1HFY23. We attribute the robust FFB output in 1HFY23 to a higher number of estate workers and dissipating effects of 2019 drought.
KLK’s manufacturing EBIT (oleochemicals and refining) dived by 29% YoY to RM501.9mil in 1HFY23, dragged by declines in selling prices and demand for oleochemical products. EBIT margin eased to 4.7% in 1HFY23 from 6.5% in 1HFY22.
Comparing 2QFY23 against 1QFY23, KLK’s core net profit fell by 56.9% to RM190.8mil due to a 15% drop in FFB production and 19.1% contraction in manufacturing earnings. Average realised CPO price edged down to RM3,727/tonne in 2QFY23 from RM3,737/tonne in 1QFY23. Average palm kernel price was RM1,864/tonne in 2QFY23, 4.5% weaker than the RM1,951/tonne in 1QFY23.
KLK is currently trading at a fair FY24F PE of 17x, which is slightly higher than the 5-year mean of 18x for large planters, and offers a decent dividend yield of 4%.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....