Investment Highlights

• We are keeping our SELL recommendation on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM22.65/share. Our fair value is based on an FY19F PE of 27x.

• KLK’s 1QFY19 core net profit was within our forecast but 9% below consensus estimates. Included in KLK’s 1QFY19 reported net profit were a RM22.5mil gain (1QFY18: RM13.6mil) on the disposal of land to the government and foreign currency gains of RM38mil (1QFY18 loss: RM120.4mil) on loans denominated in foreign currencies.

• We believe that KLK’s 1QFY19 net profit would have been weaker YoY if the effective tax rate normalises at a range of 25% to 28%. KLK’s effective tax rate was a mere 19.3% in 1QFY19 compared with 27.9% in 1QFY18 due to tax exempt and non-taxable income and utilisation of previously unrecognised tax losses.

• KLK’s plantation EBIT dropped by 60.4% YoY to RM122.1mil in 1QFY19 while manufacturing EBIT fell by 26.8% to RM110.2mil. On a positive note, farming EBIT (mainly wheat and cattle operations in Australia) surged by 92.2% to RM58.7mil in 1QFY19 from RM30.6mil in 1QFY18, underpinned by improved yields and larger harvesting areas.

• The plantation division was affected by a decline in palm product prices. Average CPO shrank by 28.7% to RM1,840/tonne in 1QFY19 from RM2,581/tonne in 1QFY18. Average palm kernel price slid by 44.7% to RM1,375/tonne in 1QFY19 from RM2,488/tonne in 1QFY18. FFB production growth was 7.9% YoY in 1QFY19.

• The manufacturing division was hit by a fall in selling prices of oleochemical products. Earnings from the China and Europe divisions fell YoY in 1QFY19, which offset earnings enhancements in the Malaysian unit.

• EBIT margin of the manufacturing division slid to 5.0% in 1QFY19 from 6.1% in 1QFY18. Comparing 1QFY19 against 4QFY18, EBIT margin improved to 5.0% from 2.2%. The margin improvement in 1QFY19 was partly boosted by fair value gains on derivatives of RM21.4mil in 1QFY19 compared with a loss of RM9.4mil in 4QFY18.

• In its results announcement, KLK said that if the recent recovery in CPO price is sustainable, prospects for the plantation division will be satisfactory in FY19F. The oleochemical division is anticipated to sustain its performance on the back of higher utilisation rates and margin improvements.

• KLK’s net gearing stood at 25.1% as at end-December 2018 compared with 24.6% as at end-September. About 28.5% of KLK’s borrowings were denominated in foreign currencies as at end-December 2018.

Source: AmInvest Research - 19 Feb 2019