Review

• Excluding forex impact and other non-core items, KLK’s 1QFY24 core profit plunged 61.8% YoY to RM203.6mn on the back of a 16.0% drop in revenue. We deem the results as within expectation as we expect better quarters ahead. For this quarter, the decline in downstream earnings offset the improvement in upstream earnings. 

• Plantation: Despite lower average selling prices of CPO (-7.1% YoY to RM3,470/tonne) and PK (-7.7% YoY to RM1,800/tonne), 1QFY24 operating profit increased 10.0% YoY to RM363.7mn, in tandem with the higher sales volume and lower production costs. 

• Manufacturing: 1QFY24 operating profit fell sharply by 79.3% YoY to RM57.9mn, mainly due to the losses incurred by the Oleochemical division, resulting from eroded profit margins as well as lower profit contributions from refineries and kernel crushing operations. 

• Property: This segment also recorded a higher operating profit of RM11.7mn (+50.5% YoY) in 1QFY24 on the back of higher revenue. 

• No dividends were declared for the quarter under review. 

Impact

• No change to our earning forecasts

Outlook

• Management is cautiously optimistic about the FY24 outlook amid a high interest environment as well as geopolitical conflicts, which could weigh heavily on the global economy and affect its downstream business. 

• The increase in global oilseed production in 2024 on larger soybean and sunflower seeds could potentially pose a downside risk to CPO prices. 

• Despite the dissipation of the El-Nino premium and lower demand, management is concerned about low palm production next quarter and tightening stocks during the Ramadan season, which may likely keep prices above RM3,800/tonne. 

• While for the Oleochemical segment, we believe the challenge remains due to oversupply and weak demand, which exerted pressure on prices.

Valuation

• We maintain KLK as SELL with an unchanged TP of RM21.50, based on CY24 PER of 18x. We believe there is still lack of strong catalysts that could drive the valuation re-rating at this juncture.

Source: TA Research - 21 Feb 2024