Kuala Lumpur Kepong (KLK) posted 1HFY24 core earnings of RM583.5m, down 29.3% YoY after stripping out 1) net loss of RM3.1m from derivative contracts, ii) fair value loss of RM7.7m on valuation of unharvested FFB, iii) loss of investment amounting to RM201m and iv) RM27.3m net corporate tax. The weaker results were in line with our and the street fullyear expectations, making up 52% and 46%, respectively. Maintain Neutral with an unchanged SOP-based TP of RM21.33. A first DPS of 20sen was declared for the quarter.

• 2QFY24 revenue (QoQ: -3.2%, YoY: -9.8%). During the quarter, revenue fell 9.8% YoY to RM5.4bn, dragged by a decline in manufacturing sales, partially cushioned by improved plantation sales. Plantation sales rose 14.1% YoY to RM983.6m on the back of higher FFB production. 2QFY24 average realised CPO price slipped from RM3,727/mt to RM3,620/mt while average palm kernel price rose 2.9% YoY to RM1,918/mt. 2QFY24 FFB production rose 8.3% YoY to 1.28m mt Manufacturing sales fell 14% YoY to RM4.4bn on the back of sluggish demand from both refinery and oleochemical businesses. Meanwhile, property sales slipped 1.4% YoY to RM56.8m, mainly attributed to slower property sales from Bdr. Seri Coalfield.

• Core earnings shrank 20% YoY. Stripping out the exceptional items, the group’s core earnings dropped 20.2% YoY to RM306.6m, mainly due to i) a slump in manufacturing earnings, ii) weaker property earnings and iii) losses from other segments. Plantation pretax earnings rose 24.5% YoY to RM357.6m, due to lower CPO production cost. Manufacturing earnings shrank from RM186m to RM56.7m due to weaker contribution from oleochemical division. Property earnings halved to RM7.6m due to weaker profit margin from the existing property projects. Lastly, investment holding registered a loss of RM162.1m, mainly due to share of equity loss of RM87.2m from an overseas associate, Synthomer plc as a result of weak performance coupled with non-operating charges incurred on amortization of acquired intangibles and restructuring costs.

• Prospects. Management continues to see weakness in manufacturing segment as oleochemical sub-segment in Europe remain loss-making and sluggish demand in China. On the positive side, there has been improvement in sales and demand compared to the previous quarter, especially in Europe.

Source: PublicInvest Research - 21 May 2024