• Keep BUY, with new MYR24.80 TP from MYR27.20, 15% upside and c.2 FY25F (Sep) yield. FY24 earnings was largely in line with our, but disappointed consensus forecasts. Kuala Lumpur Kepong should see stronger FY25F earnings, with costs moderating further and FFB output recovering from Indonesia as weather conditions remain conducive. The stock is trading at a reasonable 21x 2025F P/E vs its big-cap peer range of 18- 22x P/E.

• FY24 core net profit came in broadly within our (95%) but was below consensus (85%) estimates. KLK has yet to declare its final DPS for FY24, which we estimate at 15 sen, or a core payout of 45%.

• FY24 FFB production rose 4.2% YoY, lower vs KLK’s guidance of 10% YoY and our 7% YoY forecast. For FY25F, KLK is guiding for FFB growth of 10- 12%, as it expects a continued recovery in output in Indonesia. In YTD-Oct 2024, KLK recorded FFB decline of 1.7% YoY. To be conservative, we keep our +5-7% growth forecast for FY25-26.

• Plantation EBIT margin rose to 41.2% in 4QFY24 (from 26.4% in 3Q and 28.5% in 4QFY23), bringing FY24 margin to 29.8% (24.2% in FY23). The stronger QoQ margin came from higher ASP (+8% YoY) and lower unit costs (-34% QoQ). Management estimates FY24 production unit cost at c.MYR2,039/tonne (-9% YoY from MYR2,230/tonne in FY23). KLK applied almost all its fertiliser requirements in FY24. Going forward, management expects unit costs to decline 0-5% in FY25 to below MYR2,000/tonne, on the back of lower fertiliser prices, in line with our forecasts.

• Downstream EBIT margin fell QoQ to 0.5% in 4QFY24 (from 1.3% in 3QFY24), bringing FY24 margin to 1.2% (from 2.3% in FY23). KLK is guiding for improvement in margin in FY25, as the oleochemical segment has seen good recovery in Europe, but is wary of refining margin which remains negative. Going forward, we expect losses at its refining segment to remain given the rising CPO price environment, but this should be offset by higher oleochemical margin. As such, we lower our margin assumptions slightly.

• We lower FY25F-26F earnings by 11.6% and 10.7% after adjusting for FY24 results and lowering our FY25F-26F downstream margins slightly to 2.1- 2.9% (from 2.7-3.2%) and updating consensus earnings for its associate, Synthomer.

• Maintain BUY, with a lower TP of MYR24.80 based on an unchanged SOP valuation, which includes 4% ESG premium to reflect its score of 3.2. We expect earnings to recover in FY25F coming from stronger FFB output, lower costs and improved downstream margins. Valuation remains decent – trading at 21x 2025F P/E vs its peer range of 18-22x.

Source: RHB Securities Research - 27 Nov 2024