Kuala Lumpur Kepong (KLK) posted 1HFY23 core earnings of RM766.7m  (YoY: -42%) after stripping out i) surplus on disposal of land (RM2.6m), ii)  surolus on government acquisition of land (RM41.9m), iii) foreign exchange gain (RM82.4m), iv) gain on derivatives (RM74.9m) and share of equity loss of RM169.7m from Synthomer on impairment loss. The weak results were broadly in line with our and the street full-year forecasts, making up 45% and 46%, respectively. Nevertheless, we cut  our FY23-FY25F earnings forecasts by 23%-25% after lowering our margin assumptions for both plantation and manufacturing segments.  Maintain Neutral with a lower SOP-based TP of RM21.39. A first DPS od  20sen was declared for the quarter.

• 2QFY23 revenue (QoQ: -9.8%, YoY: -5.2%). During the quarter,  revenue fell 5.2% YoY to RM6bn due to weaker contribution from plantation and property segments. Plantation sales softened by 15%  YoY to RM862.2m, dampened by the decline in both CPO and palm  kernel prices. 2QFY23 average realised CPO price slipped from  RM4,378/mt to RM3,727/mt while average palm kernel price tumbled 52% YoY to RM1,864/mt. 2QFY23 FFB production climbed 7% YoY  to 1.18m mt Manufacturing sales fell 3.8% YoY to RM5.1bn on the back of weaker sales from oleochemical, refining and kernel crushing  operations. On the other hand, property sales surged 56% YoY to  RM58m, mainly attributed to encouraging property sales units from  Bdr. Seri Coalfield.

• Core earnings sank to RM234m. Stripping out the exceptional  items, the group’s core earnings tumbled 59% YoY to RM234m,  weighed by lower earnings contributions from plantation and  manufacturing segments. Plantation pre-tax earnings dipped 32%  YoY to RM287.2m, due to net loss of RM10.4m arising from fair value  changes on outstanding derivative contracts and higher CPO  production cost. Manufacturing earnings saw a sharp decline,  tumbling 51% YoY to RM186m, hit by lower profit contributions from  oleochemical, refineries and kernel crushing operations. Meanwhile,  non-core segment incurred a share of equity loss amounting to  RM169.7m from Synthomer, caused by an impairment loss of a  business division, amortization of acquired intangibles, restructuring  and site closure costs.

• Prospects. Management sees weaker performance for both  plantation and manufacturing segments in the 2HFY23 due to  challenging outlook for both core segments. Plantation earnings are expected to be weaker in the 2H as it sees CPO prices continued to  be trending lower amid lacklustre demand. Manufacturing segment remains challenging due to weak consumer sentiment.

Source: PublicInvest Research - 25 May 2023