Kuala Lumpur Kepong Berhad - Downstream Division Awaits More Improvement

Date: 
2024-05-21
Firm: 
TA
Stock: 
Price Target: 
23.83
Price Call: 
HOLD
Last Price: 
20.50
Upside/Downside: 
+3.33 (16.24%)

Review

  • Excluding forex impact and other non-core items, Kuala Lumpur Kepong Berhad (KLK)'s core profit for 2QFY24 rose 23.6% YoY to RM198.5mn, despite a 9.8% decline in revenue. However, the results came in below expectations, primarily due to lower-than-expected contributions from the downstream division and higher tax rate, which offset increased contribution from the upstream segment.
  • Cumulatively, 1HFY24 core net profit plunged 42.0% YoY to RM402.1mn on the back of 13.15 drop in revenue.
  • Plantation: Despite lower average selling prices of CPO (-5.1% YoY to RM3,732/tonne) and PK (-3.0% YoY to RM1,853/tonne), 1HFY24 operating profit increased 16.8% YoY to RM717.6mn. This increase was driven by higher sales volume and reduced production costs.
  • Manufacturing: The operating profit for 1QFY24 experienced a significant decline, dropping by 72.3% YoY to RM140.2mn. This decrease was primarily attributed to reduced contributions from the Oleochemical division, refineries, and kernel crushing operations.
  • Property: Despite higher revenue, this segment recorded a lower profit of RM18.7mn (-27.2% YoY) mainly due to the recognition of development profit from projects with lower gross margin.
  • The group declared a single-tier dividend of 20 sen/share for the quarter under review, which was similar to last year.

Impact

  • We revise our FY24 and FY25 earnings forecast lower by 16.4% and 13.0%, respectively, after factoring in lower contributions from the manufacturing division and higher tax rate. Meanwhile, we also introduced our FY26 earnings forecast of RM1.4bn (+12.4% YoY).

Outlook

  • For the plantation division, we anticipate that the movement of palm oil prices in coming months will be influenced by both palm oil production in key producing countries (Malaysia and Indonesia) and weather patterns in the primary soybean-growing regions of Brazil and Argentina.
  • While for the Oleochemical segment, we believe the challenge remains due to oversupply, which exerted pressure on prices. However, management guided that sales and demand are rising, especially in Europe, with reduced costs. The Group remains cautious and vigilant to face persistent industry and global headwinds.
  • Management is cautiously optimistic about the FY24 outlook and expect that the earnings will be negatively impacted by the losses incurred by its associate, Synthomer, as well as the below-par contribution from the Manufacturing segment.

Valuation

  • We upgrade KLK to HOLD from sell with a higher TP of RM23.83 (previously RM21.50), post the earnings adjustment and roll forward valuation base year to CY25, based on 20x PER.

Source: TA Research - 21 May 2024

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