KLK: Core Earnings Meet Consensus as Upstream Gains Offset Downstream Weakness, Target Price Revised Up

Investment bank RHB has maintained its “Neutral” rating on Kuala Lumpur Kepong (KLK MK), revising its target price slightly upwards to MYR21.85 from MYR21.50, indicating a 6% potential upside. The latest research report highlights a mixed performance, with core net profit for the financial year ending September 2025 (FY25) aligning with consensus estimates despite falling short of the bank’s own projections.

Performance Review

KLK’s 4QFY25 earnings came in below RHB’s expectations but were largely in line with Street estimates. The group’s FY25 core net profit reached 98% of consensus forecasts, although it was 90% below RHB’s own outlook. The primary discrepancy stemmed from slightly lower-than-expected Fresh Fruit Bunch (FFB) output and a significant reversal to loss for the downstream division in 4QFY25. For FY25, KLK declared a final dividend per share (DPS) of 40 sen, bringing the total DPS to 60 sen, representing a 55% core payout and a 2.9% yield.

FFB production saw a modest increase of 0.3% quarter-on-quarter and 2% year-on-year in 4QFY25, contributing to a 2.6% year-on-year FFB output for FY25. This figure was slightly below RHB’s growth assumption of 4.5% and management’s mid-single-digit guidance. Looking into 1MFY26, FFB output has already shown a 4% year-on-year increase. Notably, unit costs experienced a double-digit decline quarter-on-quarter in 4QFY25, though FY25 unit costs were marginally higher year-on-year. This was largely due to KLK securing 100% of its FY25 fertiliser needs at 15-20% lower prices compared to the previous year.

Downstream Challenges

The downstream segment faced considerable headwinds, with its EBIT margin reversing to a loss of -1.4% in 4QFY25, a stark contrast to the +1.2% profit recorded in 3Q. This downturn was attributed to intense competition, FX volatility, and start-up costs associated with new oleochemical facilities. Compounding these issues were higher losses from non-oleochemical segments, including gloves and flooring.

Future Outlook

RHB anticipates an improvement in oleochemical margins driven by increased utilisation of KLK’s new facilities. However, refinery margins are expected to remain tight. The group is strategically repositioning its portfolio towards higher value-added downstream applications, as evidenced by its recently announced joint venture with AAK AB to develop a specialty oils and fats refinery in Pasir Gudang, slated for completion in 2028.

While FFB output is expected to improve in FY26F, unit costs are projected to rise by 5-7% year-on-year to MYR2,000-2,100/tonne due to recent increases in fertiliser prices. RHB has adjusted its CPO and PK price forecasts for 2026F and 2027F upwards. Overall, these adjustments, alongside higher unit costs and lower downstream margins, have led to a revision in RHB’s FY26-27 forecasts by +4.6% and -0.1% respectively.

Rating and Target Price

Based on these factors, RHB maintains a “Neutral” recommendation with an updated SOP-based target price of MYR21.85, up from MYR21.50, which includes a 4% ESG premium.