Investment Highlights

• We are keeping our SELL recommendation on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM23.12/share. Our fair value for KLK is based on an FY20F PE of 27x.

• KLK reported a net profit of only RM48.6mil in 3QFY19 due to an impairment of RM146.0mil for its oil palm estate in Sinoe Country, Liberia. Based on recent High Carbon Stock and High Conservation Value studies, it was determined that there is limited plantable area in the estate. Hence, KLK has ceased operations in this area. Based on the net book value of RM110.6mil for the estate (as per KLK’s 2018 Annual Report), we reckon that KLK has fully written down the value of the asset.

• KLK still has operations in Palm Bay, Liberia. The net book value of the estate in Palm Bay is RM246mil. In total, KLK has mature areas of 3,808ha and planted areas of 7,888ha in Liberia.

• Excluding the RM146mil impairment and gains on disposal of land of RM48.7mil, KLK’s 9MFY19 core net profit was within our forecast but below consensus estimates.

• Plantation EBIT plunged by 59.1% to RM274.8mil in 9MFY19 from RM672.7mil in 9MFY18. KLK attributed the fall in plantation earnings to weaker CPO prices and an increase in the cost of CPO production. The decline in palm product prices could not be cushioned by positive contribution from the trading and processing operations.

• Average CPO price realised dived by 20.7% to RM1,925/tonne in 9MFY19 from RM2,428/tonne in 9MFY18. Average palm kernel price plummeted by 39.7% to RM1,263/tonne in 9MFY19 from RM2,094/tonne in 9MFY18. KLK recorded a FFB production growth of 4.9% YoY in 9MFY19.

• Manufacturing EBIT declined by 13.8% to RM328.5mil in 9MFY19 from RM381.1mil in 9MFY18 dragged by lower selling prices. KLK said that the fall in earnings of the European operations had offset improved performancesof the Malaysia and China units.

• Selling prices of KLK’s oleochemical products slid in 9MFY19 as KLK passed on savings from lower raw material costs to customers. Manufacturing EBIT margin was unchanged at 4.9% in 9MFY19 vs. 5.0% in 9MFY18.

• In its results announcement, KLK said that its net profit would be lower in FY19E due to weaker plantation earnings. On a positive note, performance of the oleochemical division is expected to be satisfactory in FY19E on the back of lower raw material costs.

Source: AmInvest Research - 21 Aug 2019