Investment Highlights

• We are maintaining BUY with an unchanged fair value of RM25.20/share despite KLK’s weak 1QFY24 results. We believe that KLK’s manufacturing earnings would recover on the back of improving demand for oleochemical products. Our fair value is based on a FY25F PE of 18x, which is the 5-year mean of big-cap planters. We ascribe a 3-star ESG rating to KLK.

• In its results announcement, KLK said that it sees stronger demand for oleochemical products in Europe and South- East Asia in 2QFY24. The performance of each oleochemical plant will be closely monitored. KLK will focus on operations that are underperforming to optimise costs to enhance profitability.

• KLK’s 1QFY24 core net profit (ex-disposal gains of RM11.8mil) was 7% below our forecast and 11% short of consensus. KLK’s results were disappointing due to lower- than-expected earnings from the manufacturing division, associate and joint venture. We have trimmed KLK’s FY24F net profit by 7% to account for these.

• KLK’s core net profit declined by 46.4% YoY to RM215.2mil in 1QFY24 as manufacturing earnings slumped by 79.1%.

• KLK’s manufacturing EBIT (refining and oleochemicals) dived to RM57.9mil in 1QFY24 from RM277.5mil in 1QFY23. Manufacturing EBIT margin slipped to 1.3% in 1QFY24 from 5% in 1QFY23.

• Earnings of the manufacturing division were driven mainly by refining and palm kernel crushing activities. The oleochemical segment recorded losses in 1QFY24. The size of the losses was not disclosed. KLK’s oleochemical operations are currently facing poor demand and stiff competition from Indonesia.

• On a positive note, plantation EBIT rose by 8.4% YoY to RM363.7mil in 1QFY24 as FFB production expanded and cost of production per tonne eased.

• Average CPO price slid by 7.1% to RM3,470/tonne in 1QFY24 from RM3,737/tonne in 1QFY23. Average palm kernel price was RM1,800/tonne in 1QFY24 vs. RM1,951/tonne in 1QFY23. FFB production increased by 6.2% YoY in 1QFY24.

• KLK is currently trading at an attractive FY25F PE of 16x, below the 5-year mean of 18x for big-cap planters.

Source: AmInvest Research - 21 Feb 2024