KLK’s 9MFY24 results were in line with Kenanga’s estimate but below market expectation. 9MFY24 core net profit slid 14% YoY as better upstream performance which was underpinned by higher FFB harvest and PK prices was dragged down by weaker downstream that could persist. Thus, we maintain FY24-25F core net profit forecasts, TP of RM21.00 and MARKET PERFORM call on limited downside but there is no strong upside turnaround either.

9MFY24 core net profit of RM610.8m (-14% YoY) - excluding RM114m in forex losses, RM59m from land disposal gains and RM29m of fair value gains - came in at 63% of Kenanga’s, but only 55% of consensus’ full-year forecasts. As expected, no 3Q dividend was declared.

3QFY24 core net profit more than doubled YoY thanks to better FFB harvest (+9%) and PK prices (+25%) which lifted upstream contribution amid just a slight (+5%) YoY uptick in CPO price to RM3,788 per MT. Compared to losses a year ago, downstream segment reported profit albeit with barely positive margins (<1%). QoQ, 3QFY24 core net profit also more than doubled as upstream FFB production and CPO prices were flattish while downstream weak earnings persisted. Following a share of loss of RM87m in 1HFY24 for its UK-associate Synthomer, we stay cautious on 2HFY24 performance as results are only reflected onto KLK in 2Q and 4Q. Effective tax rate eased from a high base QoQ, providing further uplift to 3QFY24 bottom line.

Better upstream environment to offset soft downstream. We are expecting CY24-25 global edible oil balance to stay fragile as supply is unable to catch up to demand this year and most likely in the next also. Oil palm expansion that has slowed considerably and yields declining on ageing trees are culpable for the limited supply. On the other hand, demand is growing 3%-4% YoY. Hence, a declining inventory would provide a continually supportive pricing environment for edible oils.

• Improving upstream margin. CPO prices are expected to hold around RM3,800 per MT while cost is likely to stay subdued for FY24 as fuel and fertiliser costs have both eased by about 10% and 30% YoY respectively. PK prices have also improved (20-30%) YoY which should help absorb some of the potential hike in Malaysian minimum wages potentially due in the next 6-12 months.

• Growing FFB output to further lift upstream earnings. YTD, FFB grew 8% thanks to a combination of recovering yields and acquisition of effectively 8,610 Ha of matured oil palm estates: 92% in PT Satu Sembilan Delapan (5,384 Ha) in Dec 2023, 90% of PT Tekukur Indah (987 Ha) in Dec 2023, and the remaining 4.57% equity in IJM Plantations (61k Ha planted) which KLK did not buy out after taking over of IJM Plantations three years ago. Yields and efficiency at IJM Plantations have also improved following the takeover thanks to some streamlining efforts.

• Downstream headwind to persist. Demand should be normalising after the over-ordering during 2021-22 but is likely to stay soft on an early and fragile European recovery with uneven growth in China and a cooler US economy. KLK’s UK-based associate, Synthomer, should see lower losses in FY24 and may turn around in FY25.

Forecasts. Maintain FY24-25F core net profit forecasts.

Valuations. We are also leaving our TP of RM21.00 unchanged based on a rolled-forward 16x FY25F PER, which correspond with the sector’s average. A 5% premium for its 4-star ESG rating as appraised by us is also imputed into the TP (see Page 3).

Investment case. We like KLK for its excellent upstream track record and defensive balance sheet with a manageable 60% net gearing even after paying RM386m for the remaining 40%-stake in a 1,012-Ha development in Senai-Skudai area of Johor to JV partner UEM Sunrise (Not Rated). However, downstream losses at Synthomer should only start to bottom out later this year or early FY25. As such we are keeping our MARKET PERFORM call.

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

Source: Kenanga Research - 20 Aug 2024