Investment Highlights

• We maintain BUY on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM25.20/share. Our fair value is based on a FY25F PE of 18x, which is the five-year average for big-cap planters in Malaysia. We attach a 3- star ESG rating to KLK.
• KLK's FFB yields were not as productive as expected in FY24E as there was a bug disease affecting the oil palm trees in Sabah. The mealybug caused moulds on the leaves, which prevented the photosynthesis process. KLK has resolved the problem by injecting a solution into the trunk of the tree.
• Hence, KLK's FFB yields in Sabah are expected to recover in FY25F. However, we believe that the group's FFB yields in Peninsular Malaysia would soften after a strong recovery in FY24E. In Indonesia, we reckon that the yield improvement would be modest in FY25F due to the two-year lagged impact of 3Q2023's El Nino. Overall, we assume a FFB output growth of 5% for KLK in FY25F, which is the same as FY24E.
• We think that KLK's ex-mill cost of CPO production would be unchanged at RM2,100/tonne in FY25F. We foresee small increases in the costs of fertiliser and wages in FY25F, which would be compensated by the rise in the volume of production.
• KLK does not face a labour shortage currently. The group is not expected to be significantly affected if the freeze on foreign workers is not lifted. This is because KLK has recruited more workers than required. Based on the planted areas of 116,953ha in Malaysia, we estimate that KLK has 11,000 to 12,000 estate workers.
• We forecast manufacturing EBIT (refining and oleochemicals) to climb by 60% to RM567mil in FY25F underpinned by stronger demand and selling prices for oleochemical products. At the peak in FY22, the manufacturing division's EBIT was RM1.1bil.
• We do not expect KLK's manufacturing earnings to jump to the peak level of RM900mil to RM1bil as refining margins in Indonesia remain compressed. To mitigate this, KLK plans to venture into high value-added refined products, which have resilient demand and margins.
• Manufacturing accounts for about 25% of KLK's pre-tax profit while plantation makes up a larger 73%. The balance 2% of group earnings come from associates, property and "others" (mainly wheat farming in Australia).

Source: AmInvest Research - 18 Oct 2024