KLK: Upstream Resilience Offsets Downstream Headwinds

AmInvestment Bank has maintained its “HOLD” recommendation on KL Kepong, with an unchanged target price of RM20.70 per share. This rating reflects a challenging outlook for its downstream refining and oleochemical businesses, which is largely offsetting anticipated robust performance from the upstream segment. The target price is derived from a CY26F PE of 18x, which incorporates a discount to account for structural challenges prevalent in the refining and oleochemical sectors.

Performance Review

The company’s upstream division is projected to deliver strong results, with a robust 60% climb in FY25F EBIT, reaching RM2.1 billion. This growth is primarily driven by high crude palm oil (CPO) prices, forecast at RM4,100/tonne in FY25F compared to RM3,653/tonne in FY24. Furthermore, fresh fruit bunch (FFB) output is estimated to grow by 3.5% in FY25, contributing to the upstream segment’s resilience.

Conversely, the downstream segment faces significant headwinds. AmInvestment Bank forecasts a substantial 68% plunge in manufacturing EBIT for the European oleochemical unit in FY25F. This decline is attributed to soft demand, elevated production costs, a 49% year-on-year surge in crude palm kernel oil prices, and significantly higher gas prices in Europe compared to those in China and the US. Additionally, KL Kepong’s 26.9%-owned Synthomer is also expected to contend with difficult market conditions.

Challenges and Competition

The report highlights that the refining and oleochemical industries in Malaysia are grappling with structural challenges, exacerbated by weakening global demand for oleochemical products amid ongoing economic uncertainties. Malaysian players, including KL Kepong, face stiff competition from Indonesian counterparts who benefit from inherent cost and currency advantages.

Future Outlook and Strategic Focus

Looking ahead, KL Kepong is expected to prioritize the development of its RM3.5 billion TechPark in Tanjung Malim. This industrial park is strategically positioned to attract automotive and auto-part companies, with anchor investor BYD’s CKD plant slated to commence production in the second half of 2026. While a non-core RM260 million gain from a 150-acre land disposal to BYD is anticipated in FY26F, this has not been factored into KL Kepong’s FY26F net earnings. The company possesses significant landbank suitable for conversion into industrial parks in other well-located areas, suggesting potential for future property development initiatives.