Kuala Lumpur Kepong - Disappointing End to FY18

Date: 15/11/2018

Source  :  PUBLIC BANK
Stock  :  KLK       Price Target  :  23.78      |      Price Call  :  HOLD
        Last Price  :  24.02      |      Upside/Downside  :  -0.24 (1.00%)

Kuala Lumpur Kepong (KLK) posted a core net profit of RM783.1m (YoY: -23.5%) for FY18 after stripping out i) provision for inventories (RM10m), ii) impairment of PPE (RM21.6m), iii) FX loss (RM33.7m) and iv) gain on derivatives (RM13.9m). The results made up only 76% and 81% of our and the street expectations, respectively. Overall, the upstream plantation was severely affected by the continuous poor CPO price performance while manufacturing segment was doing well, riding on the low feedstock cost. Pending our review for 2019 CPO price outlook, we are keeping our Neutral call with an unchanged SOP-based TP of RM23.78.

  • 4QFY18 revenue (QoQ: -3.3%, YoY: -18.8%). Compared to 4QFY17, the weaker group revenue was mainly hit by a decline in both plantation and manufacturing sales. Plantation sales shrunk 35% YoY to RM1.6bn, dragged by a decline in palm oil product prices despite a marginal increase in FFB production by 1.9% YoY. Average recorded CPO price dropped 19% YoY to RM2,060/mt while average palm kernel price dipped from RM2,162/mt to RM1,594/mt.. FY18 FFB production exceeded our full-year forecast by 3%. Manufacturing sales declined 4.7% YoY to RM2.4bn on the back of weaker sales volume from European operations and oleochemical segment. Property sales jumped 61% YoY to RM72m, bolstered by existing property projects, namely, Park Manor, Ixora, BSC Central 1 and Hemingway.
  • 4QFY18 core net profit (QoQ: -4.2%, YoY: -39.3%). The Group’s core earnings dropped 39% YoY to RM153m for the 4Q. Plantation earnings halved to RM124m, dragged by higher operating cost and losses incurred by processing and trading operations. Manufacturing segment, unexpectedly, tumbled 41% YoY to RM41m due to an impairment of RM22m on an under-performing specialized oleochemical plant. Oleochemical earnings halved to RM30m while other manufacturing units jumped nearly 4-fold to RM11.4m. Property earnings were slightly higher at RM21.2m, dragged by the recognition of property earnings from a particular phase with lower gross margin.
  • Outlook guidance. Management expects to see the current weak CPO price performance remains the key challenge to its FY19 plantation segment. Meanwhile, oleochemical segment is expected to maintain its performance with higher capacity utilizations and operational efficiencies. In short, the group foresees the 1HFY19 results will be impacted by the prevailing depressed palm oil product prices.

Source: PublicInvest Research - 15 Nov 2018

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