Kuala Lumpur Kepong - Weak Downstream Performance Weighs

Date: 
2024-05-21
Firm: 
KENANGA
Stock: 
Price Target: 
21.00
Price Call: 
HOLD
Last Price: 
20.50
Upside/Downside: 
+0.50 (2.44%)

KLK’s 1HFY24 results disappointed. Its 1HFY24 core net profit plunged 59% YoY due to weak performance from downstream operations, which negated improved upstream performance. We cut our FY24-25F net profit forecasts by 21% and 9%, respectively, reduce our TP by 9% to RM21.00 (from RM23.00) but maintain our MARKET PERFORM call.

Its 1HFY24 core net profit of RM314.9m (excluding RM66m forex losses, RM23m asset write-off and RM71m fair value gains) disappointed, coming in at only 26% and 25% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came mainly from weak manufacturing profits (palm oil refining, oleochemicals) and losses at associate Synthomer. As in the past, KLK declared a 20 sen interim dividend in 1HFY24 (vs 20 sen in 1HFY23).

YoY, its core net profit plunged 52%. Improved profitability at its upstream operation, were negated by weaker showing from manufacturing (i.e. palm oil refining and oleochemicals) coupled with operating losses at associate Synthomer (the unit also reported significantly losses a year ago but due to intangibles write-down).

QoQ, its core net profit declined 43%, similarly, due to operating losses from associate Synthomer, weaker property profits as well as higher corporate expenses and taxation.

Better upstream margins likely. Firm CPO price of RM3,800 per MT is expected to translate to RM3,400-RM3,500 for KLK over FY24-25 as global edible oil balance is likely to stay fragile up to mid-CY25. Inventory is expected to decline below CY23’s levels as supply struggles to keep pace with CY24 demand growth of 3%-4% YoY. Cost should stay mild though as fuel and fertiliser costs are now 10%-30% lower YoY with palm kernel (PK) prices showing signs of bottoming out which will further help contain the cost of milling CPO.

Upstream FFB volume is also growing, thanks to acquisitions and some recovery in yields. KLK recently acquired 8,610 Ha of effective oil palm area comprising: (a) 92% in PT Satu Sembilan Delapan (5,384 Ha) in Dec 2023, (b) 90% of PT Tekukur Indah (987 Ha) in Dec 2023, and (c) 4.57% equity in IJM Plantations (61k out of 76k Ha are already planted) which KLK had yet to buy out following the takeover of IJMP in 2021. Better yields and efficiency are also expected from IJMP post FY24 after integrating and streamlining the operations to fit better with KLK’s other units.

Downstream manufacturing to stay a drag. Demand should be normalising after the over-ordering during 2021-22 but is likely to stay soft. Recovery in China is weak even as the group’s European operations, including UK-based Synthomer, should start to turn around.

Forecasts. We cut our FY24-25F net profit forecasts by 21% and 9%, respectively, on larger losses from Synthomer. However, upstream earnings are expected to pick up on firm CPO prices and easing cost pressures. Net gearing should stay manageable, hence NDPS of 50 sen is still expected over FY24-25.

Valuations. Correspondingly, we reduce our TP by 9% to RM21.00 (from RM23.00) based on on rolled-forward 16x FY25F PER, in line with the sector’s average. A 5% premium for its 4-star ESG rating as appraised by us is also imputed into the TP (see Page 3).

Investment case. Given its excellent track record, defensive balance sheet and expansionary mode, KLK’s investment case remains healthy. Downstream manufacturing and losses at Synthomer should start improving later in 2HFY24 and FY25 on the back of restocking orders amidst signs of demand recovery. As such, despite our earnings downgrade, we are keeping our MARKET PERFORM call.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 21 May 2024

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