Lower CPO price to drag 4QFY22F earnings
- 9MFY9/22 core net profit broadly in line, at 74% of our full-year forecast.
- We expect 4QFY22F core net profit to fall 5% qoq due to lower CPO price.
- Reiterate Add, but target price lowered to reflect peak earnings in FY9/22F.
Strong 9MFY9/22 earnings due to better performances from all units
Kuala Lumpur Kepong (KLK) reported a 62%/81% yoy jump in its 3QFY22/9MFY22 core net profit to RM671m/RM1,787m. The results were broadly in line, as 9MFY22 core net profit made up 74% of our and 79% of Bloomberg consensus’ full-year estimates. We expect 4QFY9/22F earnings to be weaker qoq due to lower CPO prices. The 81% yoy jump in 9MFY22 core net profit was driven mainly by higher CPO price, profit contribution from IJM Plantations, and higher oleochemical margins. On a qoq basis, 3QFY22 core net profit grew 18%, due partly to a lower effective tax rate of 19% (vs. 22% in 2QFY22), despite the recognition of a RM21m prosperity tax during the quarter. At pretax level, 3QFY22 profit fell 21% yoy due to absence of the RM324m fair value surplus on deemed disposal of Aura Muhibbah in 3QFY21. Our estimated core net profit for 3QFY22 was higher by RM113m as we added back provision for inventories of RM126m and asset impairments of RM11m but deducted derivatives and forex gains of RM17m and RM5m, respectively.
Plantation division was the key earnings driver but …
3QFY22 plantation EBIT grew 39% yoy to RM595m, due to higher ASPs for crude palm oil (CPO) of RM4,857 (+41% yoy) and palm kernel of RM3,364 per tonne (+41% yoy), as well as a 25% rise in FFB output due to contributions from IJM Plantations. On a qoq basis, 3QFY22 plantation EBIT grew 39% due to a 9% rise in FFB output and 11% rise in average CPO price achieved. The blended average CPO price for 3QFY22 of RM4,857 per tonne is slightly higher than the RM4,735/tonne average spot prices for Indonesia/Malaysia (based on a 60/40 ratio), likely due to forward sales. Manufacturing EBIT rose 5% yoy due to higher contribution from oleochemical. However, manufacturing EBIT fell 39% qoq due to losses suffered by its refineries and kernel crushing plants, which we suspect were impacted by the 37% mom drop in CPO price in Jun. It is unclear if some of the provisions could be written back in 4QFY22F.
Lowering TP to reflect Indonesia export policy uncertainty
We project KLK to post weaker 4Q earnings due to lower CPO price, though this will be partly offset by higher output and associates earnings from 21.3%-owned Synthomer, which we estimate could amount to c.RM98m (based on its 1HFY22 net profit). We are of the view that CPO price and KLK earnings may have peaked in FY9/22F and fertiliser costs are likely to rise in FY23F. To reflect this, we lower our P/E valuation for the plantation business in the SOP from 20x to 16x (1 s.d. below 10-year mean), and cut the discount factor to our SOP from 15% to 10% to reflect lower regulatory risk in Indonesia – leading to lower target price of RM24.86 for KLK. Reiterate Add, with potential upside to come from synergies derived from its acquisition of IJM Plantations.
