Investment Highlights

• We maintain SELL on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM18.10/share. Our fair value for KLK is based on an FY21F PE of 20x.

• KLK’s 1HFY20 core net profit of RM345.6mil (ex-unrealised forex loss of RM150.5mil) was below our expectations and consensus estimates.

• We have reduced KLK’s FY20F net profit by 15.1% to account for a weaker plantation EBIT margin. KLK’s plantation EBIT margin was affected by a higher cost of production per tonne (resulting from lower volume of production) and unrealised fair value loss of RM16.0mil on derivative contracts in 1HFY20.

• KLK’s EBIT rose by 4.9% YoY to RM541.8mil in 1HFY20 underpinned mainly by a 38.0% increase in plantation EBIT. This helped compensate for a 7.7% YoY decline in manufacturing EBIT and 89.8% YoY plunge in the earnings of the “others” division (mainly wheat and cattle farming in Australia) in 1HFY20. The “others” division was affected by lower crop yields and planted areas in 1HFY20.

• KLK’s manufacturing EBIT slid by 7.7% to RM200.0mil in 1HFY20 from RM216.7mil in 1HFY19 dragged by weaker sales volume of oleochemical products and an unrealised fair value loss of RM21.8mil on derivative products (1HFY19: unrealised fair value gain of RM16.4mil). In spite of this, manufacturing EBIT margin inched up to 5.1% in 1HFY20 from 4.8% in 1HFY19. We attribute this to sales of higher value-added oleochemical products in Malaysia.

• KLK’s plantation EBIT improved by 38.0% to RM320.8mil in 1HFY20 from RM232.5mil in 1HFY19 due to stronger CPO prices in 2QFY20 and higher refining profits.

• Average CPO price realised was RM2,373/tonne in 1HFY20 compared with RM1,906/tonne in 1HFY19. On a quarterly basis, average CPO price climbed to RM2,572/tonne in 2QFY20 from RM2,207/tonne in 1QFY20.

• KLK’s FFB production fell by 10.7% YoY in 1HFY20. Comparing 2QFY20 against 1QFY20, the group’s FFB output declined by 8.9%

• Going forward, KLK said that its plantation profits would be satisfactory this year due to decent CPO prices achieved to date. The oleochemical division will focus on the recovery of its major customer markets although the operating environment is expected to be challenging this year.

Source: AmInvest Research - 28 May 2020