Kuala Lumpur Kepong (KLK) started off 1QFY22 with a strong earnings growth, doubling to RM552m after stripping out i) exceptional provision for inventories (RM45.9m), ii) surplus arising from government acquisition of land (RM3.4m), iii) foreign exchange gain (RM8.7m) and iv) gain on derivatives (RM80.9m). The strong results surpassed our and the street expectations, making up 42% and 38%, respectively. No dividend was declared for the quarter. In view of the stronger-than-expected CPO price performance, we raise our CPO price forecast to RM4,300/mt and RM3,800/mt for 2022 and 2023, respectively. Consequently, we bump up our KLK’s FY22-24F earnings forecasts by 35%-67%. Maintain Outperform call with a higher SOP-based TP of RM31.05.

• 1QFY22 revenue (QoQ: +15%, YoY: +58%). Compared to 1QFY21, the jump in revenue to RM6.8bn were driven by all core businesses. Plantation sales surged 95% YoY to RM1.1bn, led by an increase in both CPO prices and FFB production. The strong plantation sales were also contributed by the consolidation of IJM Plantations sales. 1QFY22 average recorded CPO price advanced from RM2,703/mt to RM4,063/mt while average palm kernel price rose from RM1,716/mt to RM2,864/mt. 1Q FFB production rose 30% YoY to 1.2m mt. Manufacturing segment also performed well, registering 56% jump in sales to RM5.5bn on the back of stronger oleochemical sales from all regions and better refineries sales. Property sales rose 4.9% YoY to RM56m, supported by property sales from Bdr. Seri Coalfields project.

• Earnings doubled to RM552m. Stripping out exceptional items, the group’s core earnings leapt to RM552m, driven by commendable performance from plantation and manufacturing segments despite weaker property earnings. Plantation pre-tax earnings surged 154% YoY to RM608m, bolstered by stronger plantation margin and earnings contribution from IJM Plantation. Manufacturing jumped 74% YoY to RM319m, led by stronger oleochemical earnings (YoY: +86%) from all regions and refineries and kernel crushing earnings rose 59% YoY to RM79m. Property pre-tax earnings fell 14.5% YoY to RM18.8m. Meanwhile, other businesses improved marginally to RM23.9m, led by profit from farming business as a result of higher average selling prices of all crops.

• Timely acquisition for IJM Plantations. Following the completion of the acquisition, IJM Plantations is expected to contribute additional FFB production of 916k mt, which will see the group’s FFB production growing by more than 27% for FY22. The new FFB contribution is timely given the current strong CPO price performance. Based on estimates, the acquisition of IJM Plantations is expected to boost KLK’s earnings by more than 20%.

Source: PublicInvest Research - 17 Feb 2022