• Maintain BUY, with new SOP-based MYR23.00 TP from MYR24.70, 13% upside and c.3% FY25F (Sep) yield. We expect Kuala Lumpur Kepong to see improved earnings in 2HFY24F on strong FFB output, lower unit costs and improving downstream earnings. In the longer term, earnings could be boosted by its 2,500 acre Kulai land which has been earmarked for industrial development incorporating renewable energy (RE) like solar.

• Expecting strong output for 2HFY24F. As the weather has normalised, KLK is keeping its FFB growth guidance of +14% YoY (YTD-May: +8.6% YoY). This target does not include the newly acquired 6,371ha of planted landbank in Indonesia which could add +c2-3%. Assuming a 14% growth in output, KLK would need to record a stronger 20% YoY growth in 2HFY24F, which we think is a stretch. We maintain our more conservative FY24F of +7%.

• Unit costs expected to moderate in 2HFY24. KLK’s 2QFY24 costs was MYR2,377/tonne (+19% QoQ, +3% YoY), attributable to seasonally higher wages incurred during the festive season in Indonesia. KLK expects unit costs to moderate in 2HFY24F, bringing FY24 costs to below MYR2,000/tonne (-10% to 12% YoY), from higher output and lower fertiliser costs (c.10-15% down YoY). Fertiliser application in 1HFY24 is on track at 50%. We prefer to be more cautious, expecting a smaller 5-10% YoY decline for FY24.

• Downstream demand has improved QoQ thanks to increasing EU sales volume. KLK is now seeing restocking activities and expects revenue to show positive YoY growth in FY24F (1H24: -17% YoY), while margin is expected to improve gradually. This could also come from pre-stocking activities in the EU in 4QFY24, prior to the European Union Deforestation Regulation (EUDR) implementation. Despite the weak margin in Indonesia, KLK’s expansion in East Kalimantan – including a c.2,000 tonne/day refinery (to be commercialised by end-2024) and a c.1,000 tonne/day oleochemical plant (to be completed end-2025) remains ongoing. Given the oversupply of refinery capacity in Indonesia, we believe KLK may be loss-making in the initial years of operations. This could drag margins in FY25F-26F, and we therefore adjust our forecasts accordingly.

• More interesting property outlook. KLK recently completed the acquisition of its remaining 40% stake in Aura Muhibah (AMSB) it does not own from UEM Sunrise (UEMS MK, BUY, TP: MYR1.60) for MYR386.2m, comprising 2,500 acres of land in Kulai. This land has been earmarked for industrial development and is likely to incorporate RE plans like solar or data centres, although management has yet to decide on the overall plan. Timing-wise however, KLK is looking to develop the land within five years, either solely or through partnerships.

• Maintain BUY, with a lower MYR23.00 TP. We trim earnings by 6-9% after raising FY24F unit costs and imputing the new downstream capacity. Despite this, valuation still looks attractive, at 20.5x FY25F P/E vs peers’ 20-25x.

Source: RHB Research - 3 Jul 2024