Review

• Excluding the impacts of forex movements and other non-core items, Kuala Lumpur Kepong Berhad (KLK) reported a 2.7-fold increase in core profit for 3QFY24, reaching RM295.9mn. This growth was primarily driven by stronger contributions from the plantation and manufacturing divisions.

• Cumulatively, 9MFY24 core net profit declined by 13.0% YoY to RM698.0mn, representing 68.2% of our and 63.1% of consensus’ full-year estimates. The results were considered in line with expectation as FFB production tends to grow seasonally in fourth quarter.

• Plantation: Despite lower average selling prices of CPO (-2.1% YoY to RM3,619/tonne), 9MFY24 operating profit increased 45.5% YoY to RM1.1bn, driven by higher PK prices (+5.4% YoY to RM1,978/tonne), increased sales volume, and lower production costs.

• Manufacturing: The operating profit for 9MFY24 dropped significantly by 58.3% YoY to RM197.3mn. This was primarily attributed to lower contributions from the Oleochemical division, refineries, and kernel crushing operations. Excluding the one-off gain of RM74.8mn from the disposal of paper chemical business in 9MFY23, the adjusted operating profit would have decreased by 50.5% YoY.

• Property: Despite higher revenue, this segment recorded a lower profit of RM37.7mn (-13.5% YoY) primarily due to unfavourable revenue mix which resulted in lower gross margin.

• No dividends were declared for the quarter under review.

Impact

• No change to our earnings forecasts.

Outlook

• We expect the FFB production to increase largely due to improved harvesting activities, following the resolution of labour shortage issues. However, we believe the CPO prices are likely to be affected by bumper soybean harvests in the U.S. and South America. The increase in supply in these regions, particularly of soybean and other competing oils, is expected to put downward pressure on CPO prices.

• For the Oleochemical segment, challenges persist in China due to sluggish demand and ongoing uncertainties. However, the segment is expected to perform better overall due to operational improvements and strategic initiatives. In Europe, the sub-segment has demonstrated strong recovery with increased demand and improved margins.

Valuation

• We downgrade KLK to HOLD from Buy, with a revised target price of RM22.09 (previously RM23.83). This adjustment reflects a reduction in PER by 1x multiple to 18x, aligning it with the long-term sector average PER. We see a potential downside risk to CPO prices due to weak soybean prices, driven by oversupply of soybeans.

Source: TA Research - 20 Aug 2024