Investment Highlights

• We are keeping our HOLD recommendation on Kuala Lumpur Kepong (KLK) with a higher fair value of RM22.55/share vs. RM22.05/share previously. Our fair value for KLK is based on an FY20F PE of 27x. We have raised KLK’s FY20F net profit by 2.2% to account for a higher CPO price assumption of RM2,300/tonne against RM2,200/tonne originally.

• KLK’s FY19 core net profit (ex-impairment of RM146.0mil for Liberian assets and RM91.2mil gain on disposal of land) was below our forecast but within consensus estimates. Included also in KLK’s reported net profit in FY19 was a forex gain of RM65.6mil vs. a forex loss of RM228.5mil in FY18.

• KLK’s core pre-tax profit fell by 11.2% in FY19 as prices of palm products plunged and cost of CPO production increased. KLK recorded a gain on disposal of land of RM42.5mil in 4QFY19.

• KLK would only recommend a final gross DPS at a later date. We have forecast a gross DPS of 45 sen for FY19 (FY18: 45 sen) and 47 sen for FY20F, which imply yields of 2.0% and 2.1% respectively.

• KLK’s plantation EBIT dived by 52.3% to RM400.4mil in FY19 as average CPO price realised fell to RM1,924/tonne from RM2,235/tonne in FY18. Average palm kernel price shrank to RM1,210/tonne in FY19 from RM1,967/tonne in FY18. Also, we think that KLK’s ex-mill cost of CPO production exceeded RM1,400/tonne in FY19 vs. RM1,370/tonne in FY18.

• On a positive note, KLK achieved an FFB production growth of 4.5% in FY19.

• KLK’s manufacturing EBIT edged down to RM434.6mil in FY19 from RM437.4mil in FY18 dragged by lower selling prices of oleochemical products. In spite of this, manufacturing EBIT margin rose to 5.0% in FY19 from 4.3% in FY18. We think that the enhancement in EBIT margin in FY19 was supported by a low cost of feedstock.

• Comparing 4QFY19 against 3QFY19, KLK’s core earnings improved, underpinned by a rebound in plantation EBIT. Plantation EBIT surged to RM125.5mil in 4QFY19 from RM42.3mil in 3QFY19 as sales volume increased and cost of production eased.

• KLK’s FFB production rose by 9.8% QoQ in 4QFY19. Average CPO price inched down to RM1,920/tonne in 4QFY19 from RM1,973/tonne in 3QFY19.

• Manufacturing EBIT eased by 5.2% QoQ to RM106.0mil in 4QFY19 as sales volume and selling prices dipped. EBIT margin was 5.2% in 4QFY19 vs. 5.0% in 3QFY19.

Source: AmInvest Research - 20 Nov 2019