KEY INVESTMENT HIGHLIGHTS

• Upstream; profit improved on higher CPO selling price
• Downstream; smaller profit recorded
• Earnings estimates; tweaked higher on recent revision of average CPO target price
• Maintain Buy call with a revised TP of RM23.63

Below expectation. KLK's 4Q24 core profit fell to RM119.5m (- 25.8.0%yoy), bringing the FY24 to RM860.8m (-22.5%yoy). While this was largely considered below and within our/consensus, accounting about 89% and 100%, respectively. Earnings were dragged by weaker operating profit contribution from manufacturing, property, investment holding subsegment, and impairment with a margin flattish at 6.4% (+0.4%ppt).

Plantation. During the quarter, the upstream division continued its growth momentum, with both topline and bottom-line settled at RM925.2m (+1.8%yoy) and RM518.2m (+24.1%yoy), respectively. Profit was somewhat boosted by higher CPO and PK selling prices realised at RM3,758/Mt (+8.1%yoy) and RM2,523/mt (+44.8%yoy), on top of the lower CPO production cost. As a result, the margin for the segment grew to 56.0% (+10.1ppt) in the current quarter (compared to 4Q23: 45.9%).

Manufacturing. Although its revenue was 5x higher than plantation segment, earnings wise, remains low, recording only RM22.0m (vs 4Q23: -RM76.7m). This was attributed to higher losses in the non-oleochemical division, including refineries and kernel crushing operations. The midstream refinery sub-segment continues to suffer from adverse margins due to overcapacity in the refining industry and the unexpected strengthening of CPO prices, which is the raw material for derivative products. In contrast, oleo sales and profits were improving in both Europe and Malaysia. However, the Chinese market remained persistently weak, with sluggish demand continuing to dampen the performance of derivative products.

Earnings forecast. We are upgrading our earnings estimate by +25% for FY25E-FY26F, after considering new average CPO TP price revision of RM4,300/Mt and RM4,000/Mt in those periods.

Recommedation. We are maintaining our BUY call on the stock, with a revised TP of RM23.63 as we rollover our valuation base year to FY25F EPS of 112.5 sen, pegged to PER of 21x - nearly 5y historical mean. The catalyst remains in the upstream division, with FFB yield and OER projected to increase by 21.53Mt/ha and 21.50%, driven by improved recovery from internal FFB processing and better fertilizer application over the past two years. Production costs are expected to remain low, around RM2,000-2,200/Mt for FY25E-FY26F.

Source: MIDF Research - 27 Nov 2024