2QFY22: Results Within Expectations
KLK’s 1HFY22 earnings came in within our expectations and accounted for about 55%
of our full-year assumption as we expect 2HFY22 to be lower hoh due to lower CPO
ASPs (impacted by Indonesian palm oil policies) and lower downstream margins.
However, this might be partially offset by better Malaysia upstream performance and
higher contribution from the oleochemical sub-segment. Maintain HOLD with a lower
target price of RM27.70.
RESULTS
• Within expectations. Kuala Lumpur Kepong (KLK) reported net profit of RM547m (-
8.8%qoq, +11% yoy) in 2QFY22. After excluding provision of inventories write-off of
RM39.1m, surplus from land disposal of RM0.5m, forex gain of RM31.3m and a RM10.8m
gain on derivatives, core net profit came in at RM565m (+2% qoq, +94% yoy). 1HFY22 core
net profit came in at RM1,116m, accounting for about 55% of our full-year assumption. We
deem the results within our expectation where we expected 2HFY22 would come in lower
hoh due to the lower CPO ASP (resulted from the impact of Indonesian palm oil policies)
and lower downstream margin in 2HFY22.
• Lower qoq operating profit in 2QFY22 was mainly dragged by lower upstream performance.
This was due to lower CPO sales volume, higher cost of CPO production arising from lower
fresh fruit bunch (FFB) production despite higher qoq CPO and palm kernel prices. However,
this is partially mitigated by the better qoq manufacturing segment on the back of higher margin
despite lower sales volume.
• 2QFY22 results could have been much better if not for the Indonesian domestic market
obligation in Feb-Mar 22, which resulted in lower CPO ASP, lower sales volume and weaker
contribution from Indonesia’s downstream. Recall that Indonesia had introduced domestic
market obligation (DMO) in Feb 22 which affected KLK’s CPO ASP. The DMO also resulted in
lower sales volume due to the export restriction and the delay in delivery was due to the
lengthy documentation procedures.
STOCK IMPACT
• Impact from Indonesia constantly changing the palm oil polices. We reckon that KLK
would be the most affected among all big cap plantation companies from the impact of
Indonesian palm oil policies with KLK having the highest exposure in Indonesia at about 60%
of its total estates and 7% of its total manufacturing capacity. This may result in:
a) Lower CPO ASP. With the export ban in Apr 22 and the re-introduction of the DMO policy
in Indonesia, we expect this would continue to hinder KLK’s CPO net ASP as KLK would
still need to fulfill a certain amount domestic sales (lower ASP) before it is able to export. On
top of that, the high export duty and levy would also be a huge burden for KLK.
b) Lower sales volume. Indonesia’s sales may come in lower due to the export ban in Apr 22.
Even after the lifting of the export ban, we reckon that the sales volume would still be
sluggish due to the current re-introduction of the DMO and the uncertainty of Indonesia’s
palm oil policies.
c) Lower Indonesia downstream performance with lower sales volume and utilisation rate.
With Indonesia’s previous export ban in Apr 22, we expect a lower utilisation rate for its
downstream operation in Indonesia as the export ban in Apr 22 had caused a fast increase
in their inventory.
• Partially mitigated by Malaysian upstream operation and higher contribution from its
oleochemical sub-segment. We expect the higher CPO ASP from its Malaysian upstream
operation and the stronger contribution from its oleochemical sub-segment to partially offset the
impact from its Indonesian operations. This is mainly on the back of strong demand and higher
net ASP for Malaysian operations.
EARNINGS REVISION/RISK
• Revised earnings forecast. We had factored in higher CPO assumption of RM5,200/tonne for
CY22 and RM4,000/tonne for CY23-24. (Previous: CY22: RM4.200/tonne. CY23-24:
RM3,000/tonne).
• For FY22 earnings, KLK will not be able to enjoy the high CPO prices because of
Indonesia’s frequent changes to its exports policies. KLK’s FY22 earnings had been
adjusted down by 2% despite factoring in the higher CPO ASP. The negative impact from its
Indonesian operation would offset the higher ASP impact for FY22. The frequent changes of
Indonesian policies on the exports of palm oil has resulted lower sales volume, lower ASP,
negative impact to downstream margins and higher export levy and duty. Higher CPO ASP
would be positive (assuming no more hiccups from Indonesia) for its FY23-24 earnings, which
had increased by 25% and 40% respectively.
VALUATION/RECOMMENDATION
• Maintain HOLD with a lower target price of RM27.70 (previous: RM30.00) where we peg at
a lower valuation of 16x FY22F PE as compared with other big cap plantation companies at
17x PE, given its higher exposure in Indonesia with more uncertainties.
• Interim dividend of 20 sen, which would be payable on 2 Aug 22. Based on a dividend payout
ratio of 50% for FY22, we expect KLK’s dividend yield to be at 3.3% with a total dividend of 88
sen for FY22.
SHARE PRICE CATALYST
• Better-than-expected CPO prices.
• Higher-than-expected FFB production.
• Sustainable demand and margins for downstream products.