RHB raises KLK earnings forecasts, target price on higher CPO prices

KUALA LUMPUR (April 22): RHB Institute Research has raised its earnings forecasts and target price (TP) for Kuala Lumpur Kepong Bhd (KLK) after imputing higher crude palm oil (CPO) prices.

“We raise our 2021-2022F CPO prices to RM3,200 and RM2,800 per tonne (from RM2,650 and RM2,600 respectively). With the increase in our forecasts, we lift our FY21-22F earnings [forecasts for KLK] (for the financial years ending Sept 30, 2021 and 2022 respectively) by 10%-21%.

“As we believe the risk for prices will tilt southwards from hereon, we advocate stocks that should perform in a lower-price environment,” said RHB analyst Hoe Lee Leng in a note.

RHB likes KLK for its downstream exposure in Indonesia, which will enable it to benefit from the country’s current duty structure. The research house reiterated its “buy” call on the group with a higher TP of RM28.25 (from RM27.80), a 29% upside with a 2.5% FY22 forecast yield.

“Its valuation remains undemanding at 23 times 2022F P/E (price-earnings), which is at the low end of the large-cap range of 23-28 times,” Hoe said.

At the time of writing today, KLK had risen 14 sen or 0.65% to RM21.66, valuing the group at RM23.41 billion.

Based on Oil World’s and the United States Department of Agriculture’s (USDA) latest forecasts, supply and demand for oils and fats and CPO are expected to be relatively tight in 2021, but this should be somewhat balanced by softer demand, according to Hoe.

“For 2022, despite no official forecasts yet from Oil World or the USDA, we believe soybean and other oilseed prices will moderate, along with CPO prices, from oilseeds seeing increased planting activities to take advantage of current high prices,” she said.

As for CPO, Hoe expects the stock-usage ratio trend to improve in 2022, estimating it to increase by 17% in 2022 from 16.2% in 2021.

“This will keep CPO prices above the 20-year historical average of RM2,500/tonne. However, given the rising stock/usage ratio trend, we believe CPO prices will decrease y-o-y (year-on-year) in 2022,” the analyst added.

Source: TheEdgeMarkets