Kenanga Research said demand is back to 3%-4% year-on-year growth while supply is closely catching up.
PETALING JAYA: Kuala Lumpur Kepong Bhd
(KLK) is poised for stronger quarters ahead, despite its latest disappointing first quarter results for the financial year 2024 (1Q24), say analysts.
Kenanga Research in a report said the group will likely post better 2H24 results, given tight global edible oil supply and demand balance this year that could potentially last up till mid-2025.
“This is as inventories are set to dip below the levels in 2023,” the research firm noted.
After the pandemic disruption, Kenanga Research said demand is back to 3%-4% year-on-year (y-o-y) growth while supply is closely catching up.
Relatively firm crude palm oil (CPO) price of RM3,800 per tonne is thus expected, which translates to RM3,400 per tonne for KLK over FY24-FY25.
In addition, production cost should stay mild as y-o-y fertiliser and fuel costs have trended lower by 30% to 40%.
“However, downstream recovery is expected to stay muted.
“Recessionary concerns in Europe, inflation in the United States and subdued Chinese consumption, coupled with over ordering in 2021-2022, have dampened oleochemicals demand though some restocking is expected over the next six to 18 months,” it said.
KLK has also undertaken low key expansion by “quietly” adding 8,610 ha of effective oil palm area since financial year 2023 (FY23) ended.
This indicates the group’s appetite and readiness to grow even if in gradual increments, it added.
Kenanga Research has cut the group’s FY24-FY25 net profit forecasts by 23% and 16%, respectively, on poorer-than-expected downstream recovery.
Correspondingly, it has reduced the stock’s target price (TP) by 6% to RM23 from RM24.50 previously.
Given its excellent track record, defensive balance sheet and expansionary mode, it said KLK’s investment case remains healthy but current downstream weakness may divert investors towards pure upstream albeit smaller players in the meantime.
Hence, Kenanga Research has downgraded KLK to a “market perform” from “outperform”.
Meanwhile, TA Research said KLK’s management is cautiously optimistic about FY24 outlook amid a high interest-rate environment as well as geopolitical conflicts, which could weigh heavily on the global economy and affect its downstream business.
Furthermore, the increase in global oilseed production in 2024 on larger soybean and sunflower seeds could potentially pose a downside risk to CPO prices.
Despite the dissipation of the El-Nino premium and lower demand, KLK’s management is also concerned about low palm production next quarter and tightening stocks during the Ramadan season, which may likely keep prices above RM3,800 per tonne.
As for the oleochemical segment, TA Research believes the challenge remains due to oversupply and weak demand, which exerted pressure on prices.
Hence, it has maintained KLK as a “sell” with an unchanged TP of RM21.50, based on 2024 price-to-earnings ratio of 18 times.
“We believe there is still lack of strong catalysts that could drive the valuation re-rating at this juncture,” it added.
Maybank Investment Bank (Maybank IB) Research said the group’s 1Q24 results had missed its and consensus estimates.
This is due to a shortfall in the group’s manufacturing contribution, it noted.
“While we expect stronger quarters ahead, we have trimmed FY24, FY25 and FY26 earnings per share by 5%, 2.6% and 2.7%, respectively, mainly to adjust for lower manufacturing earnings,” said the research house in a report.
It said KLK remains a “hold” given limited upside to its new TP of RM22.60 per share.
Maybank IB Research has also maintained its projected fresh fruit bunch (FFB) output growth, up 6% y-o-y.
Meanwhile, KLK has redesignated Tan Sri Lee Oi Hian as its executive chairman from the position of chief executive officer.
The plantation giant said in its filings that Lee’s new position would take effect today. This followed the retirement of Tun Raja Muhammad Alias Raja Muhammad Ali from the position of KLK’s non-executive chairman effective today.
