Investment Highlights

• We upgrade our recommendation on KL Kepong (KLK) to BUY from HOLD with a higher fair value of RM25.20/share vs. RM23.85/share previously. We believe that the drop in KLK’s share price has priced in the weakness in the oleochemical business. Also, we reckon that the global economy will improve as interest rates stop rising. This should spur demand for oleochemical products.

• We like KLK for its young oil palm trees in Indonesia, efficient plantation operations and healthy balance sheet. We have raised KLK’s FY24F net profit by 6% to account for a higher average CPO price assumption of RM3,700/tonne vs. RM3,500/tonne originally.

• Our revised fair value is based on FY24F PE of 18x, which is the 5-year mean for big cap planters. We ascribe a neutral 3-star ESG rating to KLK.

• KLK’s FY23 core net profit of RM705.4mil (ex-disposal gains of RM128.9mil) was 11% short of our forecast and 42% below consensus. The group’s results were underwhelming as losses in the oleochemical unit widened in 4QFY23.

• KLK’s FY23 core net profit fell by 67.4% YoY as palm product prices slid and manufacturing earnings slumped. Also, KLK’s 19.7%-associate, Synthomer recorded losses in FY23, dragged by impairments, restructuring and site closure costs. As a result, KLK’s share of earnings in associates swung to a negative RM174.9mil in FY23 from a positive RM142.6mil in FY22.

• Manufacturing EBIT (refining and oleochemicals) dived 63.9% to RM391.9mil in FY23. EBIT margin was 2% in FY23 vs. 4.8% in FY22. The manufacturing division was in the red in 2HFY23. The Europe oleochemical unit made losses due to high energy costs and sluggish demand. Comparing 4QFY23 against 3QFY23, manufacturing losses widened to RM76.7mil from RM33.3mil due to a restructuring cost of RM70.6mil in the European operations.

• Plantation EBIT declined by 45.6% to RM1.2bil in FY23. Average realised CPO price fell by 13.9% to RM3,639/tonne in FY23 from RM4,277/tonne in FY22. KLK’s FFB production grew by 5.2% in FY23.

• KLK is currently trading at an attractive FY24F PE of 15x, below the 5-year mean of 18x for big cap planters.

Source: AmInvest Research - 23 Nov 2023