KUALA LUMPUR: Kuala Lumpur Kepong Bhd (KLK) is expected to see improved earnings in the second half of the financial year 2024 (2HFY24) due to strong fresh fruit bunch (FFB) output, lower unit costs, and improving downstream earnings.
RHB Investment Bank Bhd (RHB Research) said in the longer term, the group's earnings could be further boosted by its 1,012 hectares of Kulai land, which has been earmarked for industrial development incorporating renewable energy (RE), such as solar power.
The firm noted that KLK is maintaining its FFB growth guidance of 14 per cent year-on-year (YoY), as weather conditions have normalised.
Assuming a 14 percent growth in output, RHB Research mentioned that KLK would need to achieve a stronger 20 per cent YoY growth in 2HFY24, which it considers to be a stretch.
RHB Research has maintained its more conservative FY24 forecast of seven per cent growth.
Meanwhile, the firm has noted that KLK's downstream demand has improved quarter-on-quarter (QoQ) thanks to the increasing European Union (EU) sales volume.
"KLK is now seeing restocking activities and expects revenue to show positive YoY growth in FY24F, while margin is expected to improve gradually.
"This could also come from pre-stocking activities in the EU in the fourth quarter of 2024 (4QFY24), prior to the European Union Deforestation Regulation (EUDR) implementation," it said.
Despite the weak margin in Indonesia, KLK's expansion in East Kalimantan continues. This includes a refinery with a capacity of approximately 2,000 tonnes per day, set to be commercialised by the end of 2024, and an oleochemical plant with a capacity of approximately 1,000 tonnes per day, expected to be completed by the end of 2025.
Given the oversupply of refinery capacity in Indonesia, RHB Research believes that KLK may be loss-making in the initial years of operations.
"This could drag margins in FY25-FY26 forecast, and we therefore adjust our forecasts accordingly," it said.
KLK recently completed the acquisition of the remaining 40 per cent stake in Aura Muhibah Sdn Bhd (AMSB) that it did not already own, from UEM Sunrise Bhd, for RM386.2 million. This acquisition includes 1,012 hectares of land in Kulai.
The land has been earmarked for industrial development and is likely to incorporate RE plans like solar or data centres, although management has yet to decide on the overall plan.
The group plans to develop the land within the next five years, either independently or through partnerships.
Overall, RHB Research has maintained a "Buy" call on KLK, with a lower target price of RM23.
It has trimmed the group's earnings by six to nine per cent after raising FY24 forecast unit costs and imputing the new downstream capacity.