KLK: Plantation Strength Mitigates Manufacturing Challenges

AmInvestment Bank has maintained its “HOLD” rating on an integrated player, citing a resilient plantation division that is expected to offset a challenging outlook for its manufacturing segment. While the refining and oleochemical industries face stiff competition and structural changes, robust crude palm oil (CPO) prices and stable fresh fruit bunch (FFB) production are poised to underpin earnings.

Performance Review

The plantation sector remains the group’s primary cash cow, with AmInvestment Bank forecasting its earnings before interest and taxes (EBIT) to improve by 6% to almost RM2.4 billion in FY26F. This positive outlook is attributed to an anticipated average CPO price of RM4,100 per tonne for FY26F, alongside a 4% growth in FFB production. Indonesia is expected to contribute significantly, accounting for 50% to 60% of the group’s FFB output in FY26F.

Conversely, the manufacturing division, encompassing oleochemicals, palm refining, gloves, and wood flooring, faces a dim outlook. Refining margins are expected to be squeezed by intense competition, particularly from new large palm refineries commencing operations in Indonesia. Despite these headwinds, the research house projects a smaller manufacturing loss of RM21 million in FY26F, an improvement from RM25.9 million in FY25, largely due to a slight uptick in oleochemical earnings.

Additionally, the group is expected to recognise a non-core gain of RM200 million in FY26F from the disposal of 151 acres of land in Selangor. These proceeds are anticipated to be used for reducing borrowings and financing working capital, though they have not been imputed into the FY26F net profit.

Challenges and Risks

The report highlights significant challenges for the manufacturing segment, including global demand weakness for oleochemical products stemming from economic uncertainties. The competitive landscape in Indonesia, with its cost and currency advantages, continues to pose a threat to Malaysian players. Key risks include a potential fall in CPO prices and persistent overcapacity within the refining industry.

Valuation and Recommendation

AmInvestment Bank reaffirmed its “HOLD” rating with a target price of RM20.80 per share. This valuation is based on an 18x estimated calendar year 2026 (CY26F) price-to-earnings (PE) ratio, which is one standard deviation below the five-year average for big-cap plantation companies. The lower PE is applied to account for the structural shifts in the refining and oleochemical industries, including excess capacity in Indonesia and China.