Investment Highlights

• We are downgrading our recommendation on KL Kepong (KLK) from HOLD to SELL with a lower fair value of RM22.65/share. In spite of the recent plunge in CPO price, KLK’s share price has remained firm.

• Among the plantation companies under our coverage, KLK has the highest foreign shareholding of 17.71%. KLK has outperformed the KLCI by 6.0 percentage points on a three-month basis and 7.7 percentage points on a sixmonth basis.

• Our fair value for KLK is based on an FY19F PE of 27x. We have reduced KLK’s FY19F net profit by 17.6% to account for a weaker plantation EBIT margin and lower CPO price of RM2,300/tonne vs. RM2,500/tonne previously.

• KLK's FY18 core results were below our expectations and consensus estimates. Apart from the weaker CPO price, the plantation unit was hit by unrealised forex losses of RM85.3mil on loans advanced to Indonesian subsidiaries and losses in the processing and trading operations. The amount of trading losses was not disclosed. Excluding the forex losses, KLK’s results would have been 6% below our forecast and 16% below consensus estimates.

• KLK’s manufacturing unit (mainly oleochemical) was affected by lower sales volume and margins in Europe and an impairment of RM21.6mil on an oleochemical plant in Malaysia in 4QFY18. KLK’s manufacturing EBIT dived 45.7% from RM99.4mil in 3QFY18 to RM54.0mil in 4QFY18. Manufacturing EBIT margin fell from 4.0% in 3QFY18 to 2.2% in 4QFY18.

• KLK will only declare the final gross DPS at a later date. So far, the group has paid a gross DPS of 15 sen. We have forecast a gross DPS of 50 sen for FY18 (FY17: 50 sen). Recall that KLK has the mandate to implement the dividend reinvestment scheme, which means that shareholders have the option to receive their dividends in the form of shares.

• KLK’s average CPO price fell by 14.6% from RM2,735/tonne in FY17 to RM2,335/tonne in FY18 while average palm kernel price declined by 22.4% from RM2,534/tonne to RM1,967/tonne. KLK’s FFB production inched up by 1.4% in FY18.

• In its results announcement, KLK said that its net profit in 1H2019 will be affected by depressed palm product prices. However, the oleochemical division is expected to maintain its performance underpinned by higher utilisation rates and operational efficiencies.

Source: AmInvest Research - 15 Nov 2018