Broker: UOB Kay Hian
Date of Report: Friday, 23 May 2025

Kuala Lumpur Kepong (KLK) Q2 2025 Results: Upstream Strength, Downstream Challenges, and Outlook for Investors

Executive Summary

Kuala Lumpur Kepong Berhad (KLK), a major player in the plantation sector with significant downstream manufacturing and property development interests, has released its 1HFY25 results. The report, published by UOB Kay Hian, maintains a HOLD rating with a target price of RM19.00, reflecting a marginal downside from the current share price. While the upstream plantation segment continues to deliver robust results, the downstream operations face ongoing margin pressures and operational headwinds.

Company Overview

• Sector: Consumer Staples (Plantation, Downstream Manufacturing, Property Development)
• Share Price: RM19.62
• Target Price: RM19.00 (Upside: -3%)
• Market Cap: RM22.27 billion (US\$5.19 billion)
• Shares Issued: 1,096.4 million
• Shariah Compliant: Yes
• Major Shareholders: Batu Kawan Bhd (47.9%), Employees Provident Fund Board (15.6%)
• 52-Week High/Low: RM23.40 / RM19.74

Share Price and Performance

• 1 Month: -0.6%
• 3 Months: -3.4%
• 6 Months: -8.7%
• 1 Year: -10.7%
• Year to Date: -8.3%

Q2 2025 Results Snapshot

Key Takeaways from 1HFY25 Results

• Core net profit for 2QFY25 reached RM257 million, up 12% quarter-on-quarter and 135% year-on-year, outpacing preview estimates due to higher average selling prices (ASPs), especially for palm kernel (PK), and increased profit from farming operations.
• Headline net profit was negatively affected by exceptional restructuring costs at associate Synthomer, with non-cash losses of RM63 million and forex losses of RM217 million weighing on the bottom line.
• Plantation segment profits softened sequentially owing to lower output, but this was partially offset by stronger ASPs. Downstream operations managed to break even at EBIT level, mainly thanks to improved oleochemical performance, though refining margins remained negative.
• For 1HFY25, core net profit surged 53% year-on-year to RM486 million, driven by better plantation ASPs, offset by downstream segment pre-tax losses.

Operating Segment Performance

• Plantation: Remained the profit anchor, with improved ASPs and higher fresh fruit bunch (FFB) output expected in 2HFY25.
• Downstream Manufacturing: Oleochemical operations showed quarter-on-quarter improvement, especially in China and Europe. However, refining margins stayed negative, and the downstream segment is vulnerable to further operational disruptions. Gas supply issues in Malaysia have already hampered sales order fulfillment in early 3QFY25.
• Property: Segment saw lower contributions, with net profit declining 43% year-on-year in 1HFY25.
• Associate & JV (Synthomer): Synthomer’s performance was mixed, with improved underlying profitability in 2H24 versus 1H24, but continued segmental volatility. Losses affected KLK’s headline numbers.

Financial Highlights and Forecasts

Stock Impact and Outlook

• Upstream Segment: Management expects continued positive performance, with higher FFB production likely in 2HFY25. This increase should help counterbalance the anticipated softening of CPO prices, which are expected to trade within RM3,800–RM4,200/tonne in the near term.
• Downstream Segment: While the oleochemical division (especially in China and Europe) is showing signs of improvement, refining operations are hampered by negative margins and recent market volatility caused by tariff-related developments.
• Operational Risks: Gas supply disruptions in Malaysia have affected oleochemical operations in early 3QFY25, potentially leading to weaker downstream profits quarter-on-quarter.
• Associate Contribution: Synthomer’s performance remains mixed, with overall profitability improving but segmental volatility persisting.

Financial and Operational Assumptions (FY25F)

• FFB Production Growth: 4.0% year-on-year
• CPO Prices (Spot): RM4,200/tonne
• Downstream Margin: 1.5%

Operational Statistics (2QFY25)

• FFB Production: 1,255,000 tonnes (down 15.4% quarter-on-quarter, down 2.6% year-on-year)
• CPO Production: 299,000 tonnes (down 16.3% quarter-on-quarter, down 4.9% year-on-year)
• CPO ASP: RM4,116/tonne (up 2.4% quarter-on-quarter, up 13.7% year-on-year)
• PK ASP: RM3,265/tonne (up 11.7% quarter-on-quarter, up 70.2% year-on-year)

Earnings Revision and Risks

• Earnings Estimates: FY25 earnings projections are maintained despite 2QFY25’s outperformance, as near-term downstream contributions may be hampered by operational disruptions and margin pressures.
• Forecasts: A sharp 34% year-on-year improvement in FY25 core earnings is still anticipated, driven by recovery in downstream margins and healthy upstream production growth, particularly from maturing palms in Indonesia and yields recovering in East Malaysia.
• Downside: FY25 earnings estimates remain below FY21–22 peak levels, mainly due to the comparatively lower contributions from the downstream segment.

Valuation and Recommendation

• Rating: HOLD
• Target Price: RM19.00, pegged to 17x FY25F PE (one standard deviation below the sector’s five-year mean of 23x)
• Rationale: While KLK’s production growth profile is positive, weak CPO pricing and limited downstream earnings visibility prompt a neutral stance. A marked recovery in downstream performance could serve as a potential rerating catalyst.

Potential Share Price Catalysts

• Better-than-expected CPO prices and production output
• Significant recovery in downstream operating margins
• Potential mergers and acquisitions activity

Environmental, Social, and Governance (ESG) Highlights

• Environmental: All Malaysian estates are MSPO certified; 80% of Indonesian estates are ISPO certified. The company is committed to no deforestation, no peatland, and no exploitation.
• Social: KLK runs smallholders’ development and best practices training programs.
• Governance: Transparent governance with an Anti-Bribery and Anti-Corruption Policy in place.

Conclusion

Kuala Lumpur Kepong remains a fundamentally solid plantation player with ongoing improvements in upstream production and a commitment to sustainability. However, the downstream segment continues to pose challenges, and the near-term outlook is clouded by operational headwinds and negative refining margins. Investors should watch for improvements in downstream profitability and potential sector rerating triggers such as stronger CPO prices or strategic M&A activity.