• Stay BUY, with new SOP-based MYR27.25 TP from MYR27.50, 21% upside and c.3% FY24F (Sep) yield. With higher FFB output and lower unit costs, Kuala Lumpur Kepong’s plantation division should see improved earnings in FY24F, albeit offset somewhat by weaker downstream earnings. Still, valuation remains attractive, trading at 17.8x 2024F vs bigcap peers of 18-20x.

• Double-digit FFB growth target. KLK is targeting 14% FFB growth for FY24, coming from all areas. Given its 2MFY24 FFB growth of 7.5% YoY, the company will need to play catch-up in 2HFY24F. We raise our FY24F growth to 9.4% (from 8%), but maintain FY25F-26F growth of 3-6%.

• New acquisition to contribute to growth. This FFB growth target does not include KLK’s recently acquired Indonesian assets, which is likely a further 2-3% growth. After accounting for this acquisition and the new areas coming into maturity of 8,000-10,000ha, we estimate it could still see an increase in mature hectarage in FY24, even after its targeted replanting of 10,000ha. The company acquired the two Indonesian plantation companies (6,371ha of planted landbank in East Kalimantan with an average age of 9- 16 years) in Dec 2023 for MYR276.5m. We believe the acquisition price is fair (at c.USD10,000-11,000/ha), after including debt to be assumed and deducting the estimated value of the 60 tonnes/hour palm oil mill. This is in line with brownfield transactions in Indonesia of USD10,000-15,000/ha.

• 10% decline in production cost expected for FY24F. KLK expects FY24F unit production cost to be <MYR2,000/tonne (c.10-15% down YoY), on the back of higher FFB production as well as reduction in fertiliser costs. KLK's tender for fertiliser for 1HFY24 was 20-30% lower YoY. We have projected a similar 10-15% decline in YoY costs for FY24F.

• Downstream looking tough. KLK's manufacturing segment recorded a loss in 4QFY23 mainly due to the continued weak demand in Europe. According to management, recovery is still slow and it has yet to see any significant improvement. As such, the company is in the midst of restructuring its EU operations by shutting down the basic oleochemical capacity at its Dusseldorf plant, reducing capacity by 70% to 48,000 tonnes pa. It expects some additional restructuring cost in FY24F, albeit much smaller than the MYR70m recognised in FY23. There should also be some cost saving once the capacity shut down is completed, which should help KLK to achieve its breakeven target for the downstream operations in FY24F. We lower our FY24F-26F margin for the downstream division to 1- 4% (from 2-6%) to reflect a more sombre outlook.

• We cut earnings by 2-9% after reducing manufacturing margins and raising FFB assumptions. Our TP however, is only reduced slightly to MYR27.25 (including a 0% ESG premium/discount), after lowering our RNAV discount for its property landbank to 70% (from 90%), given the improving property market. KLK remains attractive – trading at 17.8x 2024F vs peers’ 18-20x.

Source: RHB Securities Research - 24 Jan 2024