KUALA LUMPUR (July 3): RHB Investment Bank (RHB IB) expects Kuala Lumpur Kepong Bhd (KL:KLK) to report improved earnings in the second half of financial year 2024 (2HFY2024) on strong fresh fruit bunch (FFB) output, lower costs and improving downstream earnings.

In a results preview on Wednesday, RHB IB maintained its “buy” rating on KLK at RM20.40 with a lower target price of RM23 (from RM24.70).

The research house said KLK’s downstream demand has improved quarter-on-quarter, thanks to increasing EU sales volume.

“KLK is now seeing restocking activities and expects revenue to show positive year-on-year (y-o-y) growth in FY2024F (1H2024: -17% y-o-y), while margin is expected to improve gradually.

“This could also come from pre-stocking activities in the EU in 4QFY2024, prior to the European Union Deforestation Regulation (EUDR) implementation,” it said.

RHB IB said despite the weak margin in Indonesia, KLK’s expansion in East Kalimantan — including a circa 2,000 tonne/day refinery (to be commercialised by end-2024) and a circa 1,000 tonne/day oleochemical plant (to be completed end-2025) — remains ongoing.

“Given the oversupply of refinery capacity in Indonesia, we believe KLK may be loss-making in the initial years of operations.

“This could drag margins in FY2025F-2026F, and we therefore adjust our forecasts accordingly.

“We trim earnings by 6%-9% after raising FY2024F unit costs and imputing the new downstream capacity. Despite this, valuation still looks attractive, at 20.5 times FY2025F P/E (price-earnings) versus peers’ 20-25 times,” it said.