• Upgrade to BUY (TP: RM24.05). Kuala Lumpur Kepong (KLK) FY23 core PATAMI of RM866m came in within our forecast but trailed consensus estimates at 99% and 72%, respectively. Its earnings performance has gained traction with core profit growing by 37% QoQ to RM149.7mn, mainly supported by higher production, sales volume of CPO and PK, as well as lower CPO production costs. We believe the company will experience further recovery ahead despite challenging factors driving key segmental growth on all fronts. With the upside potential of 12% from our TP, we upgraded the stock to a BUY call with an unchanged TP of RM24.05; based on hist. low 3-year avg. P/BV of 1.74x pegged to KLK’s BV/share of RM13.82.

• Key highlights. KLK reported an improvement in FFB and CPO production to 5.25mn tonnes (+5.2% YoY) and 1.26mn tonnes (3.6% YoY), respectively, in FY23 compared to 4.99mn tonnes and 1.21mn tonnes in FY22. Nonetheless, the higher production failed to cushion the drop in the ASP of CPO and PK, resulting in lower revenue and PBT of RM23.6bn and RM1.15bn, respectively, in FY24. This was compounded by lower profit contribution from manufacturing segments, which fell sharply by 75% YoY to RM265mn due to lower revenue and profit contribution from the oleochemicals division, offsetting the higher profit from the refineries and kernel crushing operations.

• Outlook. We believe the plantation segment will continue to sustain its performance, albeit at current palm product prices, whilst FFB production is expected to grow by 3% YoY to 5.4mn tonnes in FY24 notwithstanding potential adverse effects of weather conditions in Indonesian estates and challenging posed by inexperienced workers in Malaysia. Conversely, for the manufacturing segments, although it will continue to face challenges in the business environment, especially with increased competition from new oleochemical entrants, demand for oleochemical products is expected to sustain. This is driven by a global increase in hygiene concerns. However, margins could narrow due to higher costs and sluggish demand.

Source: BIMB Securities Research - 23 Nov 2023