KLK has formalised a JV to manufacture, sell and market palm oil and specialty fats to the Middle East (ME) which is not surprising given its strategy to augment products foot print beyond Europe and Asia Pacific. The ME region offers diversification and growth for KLK, not just by tapping existing palm oil buyers in the region but also from new markets in terms of geographical and product segments. As estimated impact on earnings is small (<2%), we maintain our forecasts, TP of RM21.00 and MARKET PERFORM call.

KLK has formalised an earlier MOU into a JV and form KLK Alami Edible Oils Sdn Bhd (KAEO) with the Alami Group. KLK will control 65% of the equity in the JV and responsible for sourcing palm oil for the refinery and packaging plant in Teluk Panglima Garang as well as to manage the operations. The Alami Group will hold the other 35% of the equity and will market and sell the products mainly to the Middle East.

Although many Middle East markets such as Iran and Saudi are long standing buyers of palm oil, there is room to grow in the region, thanks to: (a) overall economic and demographic growth in the region, (b) changing lifestyle and consumption preference for snacks, pastries, and ready-to-eat meals, (c) new markets such as Iraq and Qatar which remain underpenetrated in terms of palm oil consumption, and (d) growing demand for specialty fats. Adjacent to the Middle East is also the North African region, a market which consumes as much oils and fats as the Middle East (5-7m MT a year), which is about a third of Malaysia’s entire annual production.

We also welcome the move to focus more on specialty products as the bulk refined product segment is now intensely competitive due to overcapacity in the SE region.

Forecasts. Maintained as the impact on earnings is estimated at < 2%.

Additional capex is limited as most of the operations utilise existing KLK facilities.

Valuations. We also maintain our TP of RM21.00 based on 16x FY25F PER and a 5% premium for its 4-star ESG rating.

Investment case. KLK’s track record has been good with a defensive balance sheet, and the group is still in expansionary mode. However, its downstream earnings have been facing more headwinds than usual.

Maintain MARKET PERFORM.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 26 Sep 2024