Review

• Kuala Lumpur Kepong Berhad (KLK)'s 4QFY24 results came in below expectations, primarily due to higher losses from associates and a higherthan-expected tax rate.

• Excluding the impacts of forex movements and other non-core items, 4QFY24 core net profit decreased by 45.9% YoY to RM117.2mn, driven by a 1.7% decline in revenue.

• Cumulatively, FY24 core net profit declined by 20.0% YoY to RM815.2mn, representing 79.6% of our and 80.8% of consensus’ full-year estimates.

• Plantation: FY24 operating profit increased 38.4% YoY to RM1.6bn, driven by higher average selling prices of CPO (+0.4% YoY to RM3,653/tonne) and PK prices (+14.9% YoY to RM2,115/tonne), increased sales volume, and lower production costs.

• Manufacturing: Operating profit for FY24 declined significantly by 44.9% YoY to RM219.4mn, mainly due to higher losses in the non-oleochemical division, along with losses from refineries and kernel crushing operations.

• Property: Despite higher revenue, this segment recorded a lower profit of RM45.9mn (-19.6% YoY) primarily due to unfavourable revenue mix which resulted in lower gross margin.

• No dividends were declared for the quarter under review.

Impact

• We revise FY25 and FY26 earnings down by 1.4% and 1.8%, respectively, after updating FY24 figures and factoring in lower contributions from associates.

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 increases in supply in these regions, particularly soybean and other competing oils, are expected to put downward pressure on CPO prices.

• For the Oleochemical segment, management expects a strong recovery across all sites in Malaysia and Europe, although challenges remain in China. Meanwhile, the midstream refinery sub-segment continues to face pressure from adverse margins, caused by overcapacity in the refining industry and the unexpected rise in CPO prices.

Valuation

• We downgrade KLK to SELL from Hold, with a revised target price of RM21.75 (previously RM22.09), based on CY25 PER of 18x and an ESG premium of 3%.

Source: TA Research - 27 Nov 2024