RHB Research said the group’s earnings could be boosted by its 2,500-acre land in Kulai, Johor.
PETALING JAYA: Kuala Lumpur Kepong Bhd
(KLK) is poised for improved earnings in the second half of the financial year 2024 (2H24) on strong fresh fruit bunch (FFB) output, lower unit costs and higher downstream earnings.
In the longer term, RHB Research said the group’s earnings could be boosted by its 2,500-acre land in Kulai, Johor which has been earmarked for industrial development incorporating renewable energy (RE) such as solar.
In plantations, the research house said KLK is keeping its FFB growth guidance of up 14% year-on-year (y-o-y) as the weather had normalised.
“This target does not include the newly acquired 6,371ha of planted land bank in Indonesia.
“Assuming a 14% growth in output, KLK would need to record a stronger 20% y-o-y growth in 2H24, which we think is a stretch.
“Hence, we maintain our more conservative FY24 forecast of up 7%,” noted RHB Research.
Meanwhile, the group’s unit costs are expected to moderate in 2H24, bringing FY24 costs to below RM2,000 per tonne from higher output and lower fertiliser costs.
According to RHB Research, fertiliser application in 1H24 is on track at 50%.
“However, we prefer to be more cautious, expecting a smaller 5% to 10% y-o-y decline for FY24,” it added.
Meanwhile, the downstream demand has improved quarter-on-quarter, thanks to increasing European Union (EU) sales volume.
KLK is seeing restocking activities and expects revenue to show positive y-o-y growth in FY24 (1H24: down 17% y-o-y), while margin is expected to improve gradually.
“This could also come from pre-stocking activities in the EU in 4Q24, prior to the European Union Deforestation Regulation (EUDR) implementation,” it pointed out.
Despite the weak margin in Indonesia, KLK’s expansion in East Kalimantan, Indonesia including about 2,000 tonne per day refinery to be commercialised by end-2024 and around 1,000 tonne per day oleochemical plant slated to be completed end-2025 remains ongoing.
Given the oversupply of refinery capacity in Indonesia, RHB Research said: “We believe KLK may be loss-making in the initial years of operations. This could drag margins in FY25 and FY26, and we therefore adjust our forecasts accordingly,” it added.
According to RHB Research, the group’s property operation offers a more interesting outlook.
KLK recently completed the acquisition of its remaining 40% stake in Aura Muhibah (AMSB) it did not own from UEM Sunrise for RM386.2mil, comprising land in Kulai that has been earmarked for industrial development likely to incorporate RE plans like solar or data centres.
The KLK management has yet to decide on the overall plan, RHB Research said, adding that “timing-wise however, KLK is looking to develop the land within five years, either solely or through partnerships.”
The research house has maintained a “buy” call on KLK with a target price of RM23 per share.
“We trimmed earnings by 6%-9% after raising FY24 unit costs and imputing the new downstream capacity. “Despite this, valuation still looks attractive, at 20.5 times FY25 price-to-earnings ratio versus its peers at 20-25 times,” said the research house.
