Overview of Kuala Lumpur Kepong Bhd (KLK MK)

Kuala Lumpur Kepong Bhd (KLK) is a diversified plantation company with operations in upstream plantation, downstream manufacturing, and property development. Its stock is listed under the Consumer Staples sector and is Shariah-compliant. Major shareholders include Batu Kawan Bhd (47.9%) and the Employees Provident Fund Board (15.6%).

Despite its diversified operations, KLK remains heavily influenced by the performance of its plantation segment, including the production and pricing of Fresh Fruit Bunches (FFB), Crude Palm Oil (CPO), and Palm Kernel (PK). The company’s market capitalization stands at RM23,367.5 million (approximately USD 5,045 million). Its share price on February 18, 2025, was RM20.40, with a target price of RM22.20 and an upside potential of 8.8%.

1QFY25 Results Preview

KLK is expected to announce its 1QFY25 results on February 28, 2025. Analysts project a sequential improvement in core earnings, estimating net profits of RM310 million to RM320 million, a 13-17% quarter-on-quarter (qoq) increase from RM275 million in 4QFY24. This improvement is attributed to higher FFB and CPO production, alongside a significant rise in CPO and PK selling prices.

Specifically, FFB production increased by 4.7% qoq, while CPO output rose by 4.6% qoq. Spot CPO prices in Malaysia surged by approximately RM800 per tonne qoq, which positively impacted earnings. The recovery in production is largely due to improved yields from KLK’s estates in Sabah and Indonesia, which had previously experienced weather and pest-related disruptions.

Downstream Segment Performance

KLK’s downstream operations, which include oleochemicals, refinery, and kernel crushing businesses, faced challenges in 4QFY24. The segment reported operating losses due to weaker performance in non-oleochemical businesses. However, a recovery is anticipated in 1QFY25, with guidance suggesting improved profitability in refinery and kernel crushing operations. Oleochemical operations are also expected to show sequential improvements in margins.

Despite these positive expectations, analysts remain cautious due to volatile commodity prices, which could affect realized feedstock costs and distort downstream profitability.

FY25 Production Outlook

For FY24, KLK recorded a 4% year-on-year (yoy) increase in FFB production. Management has set an ambitious target of 10% yoy growth for FY25. However, 4MFY25 data shows a slight decline in FFB production (-1.3% yoy), with January 2025 output down 4.5% yoy. Analysts have therefore adopted a more conservative projection of 6-7% yoy growth for FY25.

Key growth drivers include recovery from weather and pest disruptions in Sabah and Indonesian estates, as well as the favorable age profile of KLK’s Indonesian plantations, which are expected to drive higher yields over the next 2-3 years.

Key Financial Metrics

KLK’s financial performance is summarized below:

• Net Turnover: RM22,274 million (FY24) to RM27,526 million (FY25F).
• EBITDA: RM2,864 million (FY24) to RM3,440 million (FY25F).
• Net Profit (Adjusted): RM899 million (FY24) to RM1,411 million (FY25F).
• EPS: 83.3 sen (FY24) to 131 sen (FY25F).
• Net Debt to Equity Ratio: 50.2% (FY24) to 104.7% (FY25F).

FY25 Earnings Drivers

KLK’s FY25 core earnings are expected to rebound significantly, with a projected 57% yoy growth. Key factors include:

• Higher realized CPO prices, estimated at RM4,500 per tonne in FY25 (vs. RM4,200 per tonne in FY24).
• Progressive recovery in downstream profit margins, particularly in kernel crushing and refinery operations.
• Mitigation of losses from its associate Synthomer through deleveraging and divestment of non-core assets.

Valuation and Recommendation

The report maintains a HOLD recommendation for KLK, with a target price of RM22.20. This valuation is based on a 17x FY25F price-to-earnings (PE) ratio, which is one standard deviation below the sector’s five-year average of 23x.

While KLK benefits from elevated CPO prices and a positive production outlook, analysts remain cautious about the sustainability of the CPO price rally. A strong recovery in downstream margins could act as a potential catalyst for a rerating of the stock.

Potential Catalysts

• Better-than-expected CPO prices and production growth.
• Marked improvement in downstream operating margins.
• Potential mergers and acquisitions (M&A) activities.

Environmental, Social, and Governance (ESG) Highlights

Environmental

• All Malaysian estates are MSPO certified, while 80% of Indonesian estates are ISPO certified.
• Commitment to no deforestation, no peat land, and no exploitation policies.

Social

• Smallholders’ development and best practices training programs.

Governance

• Transparent governance practices, including an Anti-Bribery and Anti-Corruption Policy.