Comprehensive Analysis of Kuala Lumpur Kepong and Other Companies

Date: December 4, 2024

Broker Name: Maybank Investment Bank Berhad

Introduction

Kuala Lumpur Kepong (KLK) is an integrated palm oil operator with a focus on plantation and manufacturing divisions. This analysis provides a detailed look into KLK’s performance and projections, alongside a review of its market positioning and the expert recommendations from Maybank Investment Bank Berhad.

Kuala Lumpur Kepong (KLK)

Kuala Lumpur Kepong (KLK) is anticipating a significant improvement in FY25E, driven by growth in both its upstream and manufacturing divisions. With a core EPS growth estimate of +69% for FY25E, KLK’s performance is expected to outshine its previous results. The company has a trading price of 19x FY25E PER, with a target price (TP) maintained at MYR21.30, suggesting that the positives have been largely priced in.

Upstream Division

KLK’s upstream division is set to benefit from a projected increase in crude palm oil (CPO) average selling prices (ASP) and fresh fruit bunch (FFB) output. The FY24 plantation EBIT grew by 36% YoY to MYR1,587m, indicating strong performance. For FY25E, KLK projects a conservative FFB output growth of 5.75mt (+5% YoY), while targeting to reach 6.1mt (+11% YoY).

Manufacturing Division

KLK’s manufacturing margins are expected to improve in FY25E. The oleo division has been profitable and is likely to further enhance its earnings following significant restructuring efforts in FY23-24. The refinery division faced losses in FY24 due to pre-commissioning costs in East Kalimantan, but this setback is anticipated to be a one-off event.

Associate Losses and Impairment

The MYR180m impairment on KLK’s 27%-associate, Synthomer, was driven by substantial equity losses. However, KLK anticipates a reduction in equity losses from Synthomer in FY25E, minimizing the likelihood of further impairments. This could benefit KLK, especially if higher import tariffs are imposed on China’s gloves, as Synthomer supplies feedstocks to Malaysian glove makers.

Financial Performance and Forecasts

KLK’s financial performance reveals a challenging FY24 with a reported net profit of MYR615.6m, compared to a core net profit of MYR724.0m. The EBITDA margin improved slightly to 12.0% in FY24, with expectations to grow to 13.7% in FY25E. The company’s revenue is projected to rise to MYR24,410.8m in FY25E, with an EBITDA of MYR3,354.8m.

Risk Factors

Several risk factors could impact KLK’s earnings estimates and target price, including weather anomalies, lower-than-expected CPO prices, and unfavorable policies from import countries. Additionally, fluctuating crude oil prices could affect palm biodiesel demand, and competition from other oil prices like soybean and rapeseed could present challenges.

Investment Recommendations

Maybank Investment Bank Berhad maintains a “HOLD” recommendation for KLK, suggesting that the current market price reflects the expected earnings growth. The report highlights a preference for SDG MK with a “BUY” recommendation, indicating a potentially more favorable investment opportunity.

Conclusion

Kuala Lumpur Kepong is positioned to experience growth in FY25E, driven by strategic improvements in its upstream and manufacturing operations. However, investors should be mindful of potential risks that could affect the company’s performance. The “HOLD” recommendation suggests a cautious approach, while monitoring market developments closely.