Kuala Lumpur Kepong Berhad - Stellar performance from plantation operation
Tue, 20-Aug-2024 08:16 am
by Steven Chong • Apex Research

Counter

KLK (2445)

Target Price (RM)

20.35

Recommendation

Hold

Summary

  • KLK reported 3QFY24 core net profit of RM295.9m (+165.9% qoq, +173.4% yoy), bringing 9MFY24 CNP to RM610.8m (-19.2% yoy), which was below ours and consensus’ expectations, constituting 65.7% and 54.8% of forecasts respectively, due to lower-than-expected CPO price as actual CPO ASP in 9M24 was -8% lower than expectations.

  • We lower our FY24-26 earnings by -6.5%/-4.4%/-1.5% as we revised our FY24-26 CPO ASP assumption from RM3,900/RM3,800/RM3,800 to RM3,700/RM3,600/RM3,600.

  • Revised our recommendation to HOLD (Previously SELL: RM19.57) with a higher target price of RM20.35 based on 17.4x PER pegged to FY25 EPS. 

     

Results Review

  • Results review. KLK reported 3QFY24 revenue of RM5.5bn climbed 0.9% qoq and 7.6% yoy. Meanwhile, core net profit stood at RM295.9m, jumped 165.9% qoq and 173.4% yoy. CNP was derived after stripping out one-off adjustments of RM55.7m (Foreign exchange loss: RM48.1m, loss on derivatives: RM42.7m, surplus of government acquisition of land: -RM31.5m, and surplus on land disposal: -RM3.7m). 

  • The salient yoy performance was mainly lifted by higher CPO and palm kernel average selling prices under plantation segment coupled with turnaround in manufacturing segment as demand from Europe continue to recover, leading to improving margins.

  • Below expectations. The Group’s 9MFY24 CNP of RM610.8m came below both our and consensus expectation, only matching 65.7% and 54.8% of the full year forecasts. The variance was due to lower-than-expected CPO price as actual CPO ASP for 9M24 was -8% (Actual: RM3,619 vs Assumption: RM3,900), lower than expectations. 

  • Operations Highlights. Plantation segment’s revenue picked up to RM898.0m in 3QFY24 (+31.4% yoy) with operating profit of RM363.4m (+188.8% yoy). The strong performance was attributed by higher selling prices in both CPO (+4.7% yoy) and Palm kernel (+25.1% yoy) coupled with robust FFB production (+9.5% yoy). Concurrently, the manufacturing segment registered improved revenue of RM4.5b (+3.5% yoy) during the quarter. Operating profit has also turnaround to RM23.2m from a loss of RM73.7m, owing to improved demand from the European market.

  • Industry Highlights. KLK expanded its existing oleochemical complex in China, focusing on producing new high-purity fatty acids and glycerin. The oleochemical complex is located on 58-ac land with an annual processing capacity to 500,000 tonnes. This has enabled KLK to cater to a growing market, as China is one of the largest consumers of oleochemical products. However, we remained cautious on the Chinese market due to stiff competition.

  • Outlook. We foresee palm oil price to soften in 2H24 heading towards RM3,800/MT due to build up in inventory as palm oil production enters the peak cycle. All in, CPO price is expected to average at RM4,000/MT in 2024 and soften in 2025 to RM3,800/MT in absence of any notable catalyst.  

  • Valuation. We tweak our earnings forecast lower for FY24-26 by -6.5%/-4.4%/-1.5%, adjusting to our CPO ASP assumption. We revised our recommendation to HOLD (previously SELL) with a higher target price of RM20.35 after rolling forward valuation base year to FY25. Our TP is based on 3-year forward PE of 18.0x and FY25F EPS of RM1.13.

  • Risk. EU export ban and regulations, changing weather patterns affect FFB production, taxation and export ban in Indonesia threatens local CPO demand, shortage of labour and rising operational cost.

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