Investment Highlights

• We are keeping our SELL recommendation on Kuala Lumpur Kepong (KLK) with a lower fair value of RM23.12/share vs. RM23.45/share previously. Our fair value for KLK is now based on an FY20F PE of 27x instead of FY19E. We have reduced KLK’s FY20F net profit by 6% to account for a lower CPO price assumption of RM2,200/tonne vs. RM2,350/tonne previously.

• For FY19F, we have revised KLK’s net profit downwards by 19.5% to account for a weaker CPO price of RM2,100/tonne against RM2,300/tonne originally and lower plantation EBIT margin.

• KLK’s 1HFY19 core net profit (ex-gains on disposal of land of RM48.1mil) was 23% below our forecast and 30% short of consensus estimates. KLK’s plantation EBIT fell by 57.0% YoY to RM232.5mil in 1HFY19 while manufacturing EBIT declined by 22.6% to RM216.7mil.

• Included in KLK’s reported net profit in 1HFY19 were a gain of RM48.1mil on the disposal of land to the government and foreign currency gains of RM35.5mil (1HFY18: loss of RM221.8mil) on loans denominated in foreign currencies.

• The plantation division was hit by weak palm product prices in 1HFY19. Also in 2QFY19, KLK’s plantation unit was hit by an unrealised loss of RM15.3mil from fair value changes on derivative contracts. In comparison, there was an unrealised gain of RM20mil in 1QFY19.

• Average CPO price realised dived by 23.4% to RM1,906/tonne in 1HFY19 from RM2,487/tonne in 1HFY18. Average palm kernel price shrank by 41.2% to RM1,340/tonne in 1HFY19 from RM2,280/tonne in 1HFY18.

• FFB production growth was 5.6% YoY in 1HFY19. We have assumed that KLK’s FFB production would increase by 4.5% in FY19F.

• KLK’s manufacturing division (mainly oleochemical activities) was affected by lower selling prices and a smaller unrealised gain on derivatives of RM16.4mil in 1HFY19 (1HFY18: RM47.1mil). EBIT margin was 4.8% in 1HFY19 vs. 5.4% in 1HFY18. Comparing 2QFY19 against 1QFY19, manufacturing EBIT contracted by 3.3% to RM106.5mil. EBIT margin was 4.7% in 2QFY19 vs. 5.0% in 1QFY19.

• In its results announcement, KLK said that its group operational profit would be lower in FY19F compared with FY18. Plantation earnings would be weaker in FY19F due to softer palm product prices. On a positive note, oleochemical profits are expected to be reasonable in FY19F as economies of scale from higher capacity utilisation compensate for volatile margins.

Source: AmInvest Research - 16 May 2019