• Keep BUY, with new TP of MYR26.10 from MYR28.65, 16% upside and c.3% FY23F (Sep) yield. 1HFY23 results were broadly in line with our and consensus estimates. FFB output should improve in 2HFY23, although downstream margins could remain rangebound. Kuala Lumpur Kepong remains the most inexpensive big-cap planter – it is trading at 15x 2023F P/E, the lowest among big-cap peers which are trading at 15-18x P/E.

• 1HFY23 core net profit was largely in line with our and consensus estimates, coming in at 45-51% of FY23F. Excluded from the 2Q profit was an impairment of cMYR192m for associate Synthomer. KLK declared an interim DPS of 20 sen (1HFY22: 20 sen).

• 1HFY23 FFB production rose 8.9% YoY, lower vs KLK’s guidance of 18% YoY for FY23F but in line with our 8.4% forecast. YTD-7MFY23, FFB growth moderated slightly to 6.6%. KLK maintains its guidance but we keep our growth of +8.4% for FY23F and +5-6% for FY24F-25F.

• Plantation EBIT margin fell to 24% in 2QFY23 from 29.5% in 1QFY23, and 34% in 2QFY22. The weaker QoQ margin was from weaker FFB output (-15% QoQ), while weaker YoY margin was due to lower CPO (-15% YoY) and PK (-52%) ASPs. Management estimates 1HFY23 production unit cost at c.MYR2,300/tonne (from MYR1,900/tonne in FY22 and up from the previous MYR2,100/tonne guidance) due to higher fertiliser costs (+30-35% due to the timing of the purchase) and full-year impact of the minimum wage hike in Malaysia. We raise our cost assumptions accordingly.

• Downstream EBIT margin fell QoQ and YoY. The downstream segment recorded a QoQ fall in margin to 4.4% in 2QFY23 (from 5% in 1QFY23), bringing 1HFY23 margin to 4.7% (from 6.5% in 1HFY22). This was likely from Indonesia tax levies normalising in mid-Nov 2022, causing Malaysian refineries to lose competitiveness. We think our original forecasts may have been too optimistic, as such, we trim FY23F margin to 5-6% (from 6-7%).

• We cut FY23F earnings by 10-14% after adjusting for higher unit costs, lower downstream margins as well as lower FY23F-25F consensus earnings for Synthomer.

• Maintain BUY, with a lower TP of MYR26.10 (from MYR28.65) based on an unchanged SOP valuation. Our valuation comprises: 20x 2023F P/E for the plantation unit, 15x 2023F P/E for the manufacturing business, a 90% discount applied to the RNAV of its property landbank, and a 4% ESG discount to reflect its revised score of 2.8. KLK remains the most inexpensive big-cap planter under our coverage – trading at 15x 2023F, at the low-end of its peer range of 15-20x.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023