Kuala Lumpur Kepong kick started 1QFY24 with core earnings of RM204m, down 61% YoY after stripping out 1) surplus on disposal of land (RM5.9m), 2) surplus on government acquisition of land (RM11.7m), 3) FX loss (RM56.3m) and 4) gain on derivatives (RM61.9m). The weaker than expected results, which made up only 15% of our and the street fullyear expectations, were dragged by a slump in manufacturing earnings. We cut our FY24-26F earnings forecasts by 8-16% to reflect the weaker margin in the oleochemical and refinery margin. Maintain Neutral with a new TP of RM21.33 after rolling over our valuations to FY25. No dividend was declared for the quarter.

• 1QFY24 revenue (QoQ: -2.4%, YoY: -16%). During the quarter, revenue fell 17% YoY to RM5.6bn mainly due to weaker plantation and manufacturing sales. Plantation sales softened by 1.6% YoY to RM951m, dampened by the decline in palm oil product prices. 1QFY24 average realised CPO price slipped from RM3,737/mt to RM3,470/mt while average palm kernel price dropped 7.7% YoY to RM1,800/mt. 1QFY24 FFB production rose 6.2% YoY to 1.48m mt Manufacturing sales fell 19% YoY to RM4.4bn on the back of sluggish demand from both refinery and oleochemical businesses. On the other hand, property sales doubled to RM70m, mainly attributed to encouraging property sales from Bdr. Seri Coalfield.

• Core earnings shrank 61% YoY. Stripping out the exceptional items, the group’s core earnings tumbled 61% YoY to RM204m, mainly due to a slump in manufacturing earnings, partially cushioned by stronger plantation and property earnings. Plantation pre-tax earnings rose 11% YoY to RM370m, due to lower CPO production cost. Manufacturing earnings shrank from RM254m to RM25.3m due to losses of RM9.4m incurred by the oleochemical division and sharp decline in refinery and kernel crushing earnings. Property earnings increased from RM8.9m to RM11.9m, led by existing property projects. Lastly, investment holding registered a loss of RM39.4m, dragged by lower profit from farming business as sales volume declined due to adverse weather conditions that affected crop production.

• Prospects. Management expects CPO prices to remain above RM3,800/mt level, supported by low production in the next quarter and tightening stocks ahead of Ramadan season. It will focus on improving yields via implementation of site-specific strategies to overcome low yield issues in certain region. Meanwhile, the group sees stronger oleochemical demand in Europe and Southeast Asia for the next quarter.

Source: PublicInvest Research - 21 Feb 2024