Investment Highlights

• We maintain SELL on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM22.55/share. Our fair value for KLK is based on an FY20F PE of 27x.

• KLK’s 1QFY20 core net profit of RM167.2mil was 21% below consensus estimates and our expectations. In spite of this, we are keeping our FY20F net profit forecast for KLK for now as the group’s results in 2QFY20 are anticipated to be better.

• KLK’s core net profit (excluding a RM22.5mil gain on the disposal of land in 1QFY19) declined by 26.8% YoY to RM167.2mil in 1QFY20 due to a 16.8% drop in manufacturing EBIT and 82.2% fall in profits of “others” (mainly farming profits in Australia). These offset a 30.9% YoY rise in plantation EBIT in 1QFY20. KLK’s wheat production declined YoY in 1QFY20 as the drought in Australia had affected yields.

• KLK’s interest expense also rose by 46.5% YoY to RM63.4mil in 1QFY20. We believe that this was due to the issuance of RM2bil Sukuk notes in 2H2019.

• Plantation EBIT improved by 30.9% to RM159.8mil in 1QFY20 from RM122.1mil in 1QFY19 underpinned by a higher CPO price. Average CPO price was RM2,207/tonne in 1QFY20 vs. RM1,840/tonne in 1QFY19. Average MPOB spot price was RM2,470/tonne in 1QFY20.

• Although KLK’s CPO price realised rose, the group’s average palm kernel price slid YoY in 1QFY20. Average palm kernel price was RM1,247/tonne in 1QFY20 against RM1,375/tonne in 1QFY19.

• KLK’s FFB production contracted by 11.5% YoY in 1QFY20 as its FFB yields were affected by the drought in Malaysia and Indonesia from July to September 2019. We forecast KLK’s FFB production to inch down by 1.6% in FY20F as mature areas are expected to shrink due to an intensive replanting programme. Also in 1QFY20, KLK’s FFB yields were affected by the dry weather in FY19. We believe that KLK would be replanting about 11,000ha to 14,000ha of ageing oil palm trees in FY20F (FY19: 11,000ha).

• Manufacturing EBIT slid by 16.8% YoY to RM91.6mil in 1QFY20 dragged by weaker selling prices of oleochemical products. EBIT margin was lower at 4.8% in 1QFY20 compared with 5.0% in 1QFY19 due to an increase in the cost of raw materials and unrealised fair value loss of RM4.4mil (1QFY19: unrealised fair value gains of RM21.4mil).

• Going forward, KLK said that its plantation profits would be higher in FY20F. However, the oleochemical division’s performance would be challenging due to stiff competition and higher raw material costs.

Source: AmInvest Research - 18 Feb 2020