KLK’s FY23 results missed our forecast but met market expectations. Its upstream earnings recovered strongly in 4QFY23 on flat CPO prices, higher FFB output and lower cost but downstream continued to face headwinds. This trend is expected to continue into FY24-25. We cut our FY24F net profit forecast by 6% but maintain our TP of RM24.50 and OUTPERFORM call.

Its FY23 core net profit missed our forecast by 12% but was in-line with market expectation. The variance against our forecast came largely from weaker-than-expected downstream resource manufacturing.

It FY23 core net profit fell 43% YoY as lower CPO prices and high costs dampened upstream earnings, while downstream refining margins tightened on stiff competition and oleo-chemicals faced demand challenges.

The one-off items which were excluded for the core net profit are: (i) GBP126m (c.RM170m at KLK’ level) of goodwill write-down in 2QFY23 by 27%-associate Synthomer for its newly acquired adhesive unit, (ii) RM159m of forex loss, (iii) RM128m of disposal gains, (iv) RM68m of fair value gains, (v) RM71m of one-off European oleochemical restructuring cost, and (vi) RM61m of provision against collection on IJM plasma cost.

Its net gearing nudged up from 47% 3QFY23 to 52% as of end-Sep 2023 from expenditures for annual replanting, Temix Oleo’s acquisition and payment of interim dividend. As was the practice over the past 3-4 years, a final dividend will be declared about a month later.

Better FY24 earnings expected. The global edible oil supply and demand balance is still expected to stay tight in 2024 (potentially till mid-2025) as supply looks uncertain depending on weather development while demand is reverting back to longer term growth of 3- 4% YoY after being disrupted for 2-3 years by the pandemic. Relatively firm CPO price of RM3,800 per MT is expected for KLK over FY24 and FY25. Production cost should ease as fertiliser and, to a lesser extent, fuel costs have trended lower. Downstream margins are expected to stay weak but steadier than FY23 on easing de-stocking pressure but with competition staying intense.

Forecast. We cut our FY24F net profit forecast by 6% and introduce our FY25F numbers. Its forward margins are expected to inch up on easier YoY fertiliser and energy costs even though their prices are still not low by historical measure. The PKO price downtrend has started slowing and is expected to stabilise over FY24. Upstream productivity in Malaysia has also normalised with shortages of labour easing. Its net gearing is expected to stay manageable if not moderate further. We continue to expect NDPS of 50.0 sen over FY24-25.

Maintain OUTPERFORM, along with TP of RM24.50 which is based on updated past 6-month sector PER of 16x against FY24F CEPS. A 5% premium for its 4-star ESG rating as appraised by us is also imputed into the TP (see Page 3). Given its good track record, defensive balance sheet and expansionary mode, KLK remains our sector pick.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 30 Nov 2023