KLK: Plantation Sector Stronghold Drives Earnings Beat, Positive Outlook Maintained

A leading investment bank has upgraded its rating for a key player in the plantation sector, citing robust financial performance that surpassed consensus estimates for the full fiscal year. The company reported a significant increase in core earnings, primarily driven by strong contributions from its upstream plantation division.

Performance Review

For the fourth quarter of FY2025, core net profit surged 2.3-fold to RM274.9 million, excluding forex effects and other non-core items, on an 11.0% increase in revenue. Cumulatively for FY2025, core earnings expanded by 59.1% year-on-year to RM1.3 billion, with revenue growing 12.3%. This strong performance was largely attributed to the plantation segment, which saw its operating profit climb 41.5% year-on-year to RM2.2 billion. This was primarily fueled by higher sales volume and an 8.5% rise in the average selling price of Crude Palm Oil (CPO) to RM3,964 per tonne, alongside a substantial 52.0% increase in Palm Kernel (PK) prices.

Challenges and Downstream Weakness

Despite the overall positive results, the manufacturing segment faced headwinds, posting an operating loss of RM25.9 million in FY2025, a stark contrast to the RM219.4 million profit recorded previously. This decline was mainly due to lower contributions from the Oleochemical division and increased losses from the refineries. Management acknowledged the challenging operating environment for manufacturing, citing margin pressures, forex volatility, a difficult European market, and start-up costs for new facilities. Midstream refining margins also remained tight due to competitive pricing and high feedstock costs. The property segment also experienced a modest decline in operating profit of 7.9% year-on-year.

Future Outlook

Looking ahead, the investment bank anticipates a gradual recovery in the downstream segment, supported by improving utilization rates and easing start-up costs at new oleochemical facilities. Near-term support for palm oil prices is expected from seasonally weaker production and potential La Nina-related disruptions to harvesting activities, which could further enhance earnings visibility. However, a cautious view on CPO prices for 2026 is maintained, as ample South American soybean supply and the resumption of U.S.-China trade could limit CPO demand. Strong biofuel demand might offer some support, but weather and trade policy shifts remain key factors for future price stability. The investment bank has revised its FY26 and FY27 earnings forecasts lower by 4.4% and 2.6% respectively, primarily due to updated FY25 results and higher tax rates.

Recommendation and Target Price

The investment bank has upgraded its recommendation to BUY from Hold, setting a higher target price of RM23.09 per share. This revised target price is derived from a CY2026 Price-to-Earnings (PER) ratio of 18x and includes a 3% ESG premium, reflecting expectations of a gradual recovery and sustained performance.