Kuala Lumpur Kepong Bhd: A Detailed Financial & Stock Outlook

Broker Name: UOB Kay Hian

Date of Report: Friday, 10 January 2025

Company Overview

Kuala Lumpur Kepong Bhd (KLK MK) is a prominent plantation company with diversified operations spanning upstream plantations, downstream manufacturing, and property development. Listed under the Consumer Staples sector, KLK is a Shariah-compliant stock with a market capitalization of RM23.42 billion. Its primary shareholders include Batu Kawan Bhd (47.9%) and the Employees Provident Fund Board (15.6%).

Stock Performance and Valuation

The current share price of KLK stands at RM21.36, with a target price of RM22.20, reflecting an upside potential of 3.9%. The stock’s 52-week high and low are RM23.40 and RM19.74, respectively. Despite its exposure to elevated crude palm oil (CPO) prices, the recommendation remains a “HOLD” due to cautious optimism regarding the longevity of the CPO price rally and the downstream business recovery.

FY24 Performance Recap

KLK faced a subdued FY24, with its core net profit declining by 4.5% year-on-year (YoY). The downturn was primarily attributed to weaker profitability in the downstream segment, particularly the non-oleochemicals divisions. However, the upstream plantation segment performed robustly, supported by higher sales volumes and improved average selling prices (ASPs), especially for palm kernel products.

Outlook for FY25

KLK is projected to rebound significantly in FY25, with anticipated earnings growth of 57% YoY. Key drivers include:

• Higher ASPs for upstream operations, with an expected average CPO price of RM4,500/tonne in 2025 (up from RM4,200/tonne in 2024).
• Enhanced downstream profit margins, particularly in kernel crushing and refinery operations.
• Substantial easing of losses from the associate company Synthomer, owing to deleveraging efforts and divestment of non-core operations.

Plantation Segment

Management forecasts a 10% YoY growth in fresh fruit bunch (FFB) production for FY25, reaching 6.1 million tonnes. The production split is expected to be 40:60 between Malaysian and Indonesian estates. Notably:

• East Malaysian estates showed only a modest FFB yield improvement in FY24 (20.6 mt/ha versus 20.5 mt/ha in FY23) due to pest issues and poor pollination. However, better yields are expected in Sabah moving forward.
• Two-thirds of Malaysia’s output is locked in on a three-month forward basis, while Indonesian estates mainly rely on spot pricing.
• Replanting efforts remain on track, with 10,000 hectares targeted annually. Approximately 9,200 hectares were replanted in FY24.

Downstream Segment

The downstream segment is set for a progressive recovery in FY25:

• European operations have shown positive momentum for three consecutive quarters.
• Domestic Malaysian operations are witnessing gradual recovery in volume demand and product margins.
• Chinese operations, which previously operated at negative margins, have recently turned slightly positive.
• Groupwide refining margins are expected to remain positive in Indonesia and Malaysia, supported by recent export taxation changes.

Production Costs and Fertilizer Management

KLK’s unit CPO production costs averaged RM2,040/tonne in FY24 (down from RM2,229/tonne in FY23). For FY25, costs are expected to decrease further to RM1,900/tonne, driven by yield improvements. However, a 2-5% groupwide increase in unit costs is anticipated due to Malaysian minimum wage hikes and mandatory EPF contributions for foreign workers. Fertilizer costs for 1HFY25 are 10-15% lower YoY, with nearly 100% of budgeted application achieved in FY24.

Key Financials

Environmental, Social, and Governance (ESG) Updates

Environmental

• All Malaysian estates are MSPO certified, while 80% of Indonesian estates are ISPO certified.
• KLK is committed to no deforestation, no peat land development, and no exploitation practices.

Social

• Provides training programs for smallholders to adopt best practices.

Governance

• Adheres to transparent governance with an Anti-Bribery and Anti-Corruption Policy.

Valuation and Recommendation

UOB Kay Hian maintains a “HOLD” recommendation for KLK, with a target price of RM22.20. The valuation is pegged to 17x FY25F PE, which is one standard deviation below the five-year sector average of 23x. The neutral stance reflects cautiousness regarding the sustainability of the CPO price rally and the pace of downstream recovery.

Stock Catalysts

Potential share price catalysts for KLK include:

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