• HOLD (TP: RM24.05). Kuala Lumpur Kepong (KLK) 1HFY24 core PBT RM571.7mn came in within our forecast but trailed consensus estimates at 48% and 31%, respectively. Both 1HFY24 revenue and core PBT decreased by -13% YoY and -33% YoY, respectively, primarily due to underperformance in the Manufacturing and Property segments. However, the Plantation segment profit jumped by +17% YoY, supported by higher sales volumes of CPO and PK, as well as better CPO production costs. Looking ahead, we expect the Plantation segment to remain stable due to steady demand. However, we remain cautious on the Manufacturing segment due to intense competition from new entrants. An interim DPS of 20sen was declared (vs. 2QFY23: 20sen), and we maintain our FY24f DPS at 50sen, translating into a 2.2% dividend yield. Maintain our HOLD call with TP of RM24.05, based on a hist. low 3-year avg. P/BV of 1.74x, pegged to KLK’s BV/share of RM13.82.

• Key highlights. On a QoQ basis, KLK's core PBT dropped by 33% to RM228.9mn, reflecting a 3% decline in revenue to RM5.5bn, mainly due to lower performance in the Plantation and Property Development segments (see Table 2). The Plantation segment's profit fell by -3% QoQ, primarily due to lower sales volumes of CPO and PK despite the Ramadhan festivities. This decrease was partially mitigated by better realised selling prices (CPO: +4.3% QoQ to RM3,620/MT, and PK: +6.6% QoQ to RM1,918/MT). Overall, the Plantation profit margin compressed by 2.6 ppts QoQ to 36.4%, caused by higher CPO production costs. Nevertheless, the Manufacturing segment's profit surged to RM56.7mn (+124% QoQ), thanks to improved profit margins in the Oleochemicals division, which more than offset the lower performance in refineries and kernel crushing operations.

• Outlook. Going forward, despite stiff competition from soybean oils, the Plantation segment is expected to maintain its performance as major importing countries, such as India start to switch back to palm oil due to higher prices of other oilseeds caused by tight supply resulting from adverse weather conditions in Europe and Black Sea region. For the Manufacturing segment, despite global challenges and increased competition, management expects improved demand for Oleochemical in Europe. However, there is a possibility of margin erosion due to cost concerns and lower utilisation rates.

Source: BIMB Securities Research - 21 May 2024