Investment Highlights

• We maintain HOLD on Kuala Lumpur Kepong (KLK) with an unchanged fair value of RM24.40/share. Our fair value for KLK is based on an FY21F PE of 27x.
• KLK’s annualised 9MFY20 core net profit of RM569.6mil (ex-unrealised forex loss of RM5.9mil) was marginally above our estimates but within consensus.
• We have raised KLK’s FY20E net profit by 3.7% to account for a higher share of net profit from associates. Synthomer became an associate of KLK in FY20E after the group subscribed to Synthomer’s rights issue in 2019. Also, KLK’s 20.1%-owned Synthomer PLC benefited from the strong demand for chemicals from glove companies.
• Comparing 9MFY20 against 9MFY19, KLK’s core net profit climbed by 5.5% on the back of higher palm product prices and positive refining margin.
• Plantation EBIT (upstream, palm refining and kernel crushing) expanded by 95.6% YoY to RM537.7mil in 9MFY20. Average CPO price realised was RM2,328/tonne in 9MFY20 vs. RM1,925/tonne in 9MFY19. Average palm kernel price was RM1,366/tonne in 9MFY20 against RM1,263/tonne in 9MFY19.
• Strong CPO prices compensated for poor FFB production in 9MFY20. KLK’s FFB output fell by 5.5% YoY in 9MFY20. This is due to the lagged impact of the drought and haze, which took place in Indonesia and Malaysia in 3Q2019. Indonesia accounts for more than half of KLK’s FFB production.
• KLK’s manufacturing (mainly oleochemicals) EBIT slid by 3.0% YoY to RM318.5mil in 9MFY20 due to a drop in sales volumes. Manufacturing EBIT margin inched up to 5.3% in 9MFY20 from 4.9% in 9MFY19.
• Comparing 3QFY20 against 2QFY20, KLK’s core net profit (ex-unrealised forex changes) slipped by 4.6% to RM196.5mil dragged by lower palm product prices.
• Average CPO price realised shrank by 12.9% to RM2,239/tonne in 3QFY20 from RM2,572/tonne in 2QFY20. Average palm kernel price slid by 14.4% to RM1,316/tonne in 3QFY20 from RM1,537/tonne in 2QFY20. On a positive note, FFB production rose by 13.9% QoQ in 2QFY20.
• Surprisingly, KLK’s manufacturing EBIT rose by 9.4% QoQ to RM118.5mil in 3QFY20 partly due to an unrealised fair value gain on derivative contracts of RM20.4mil (2QFY20: fair value loss of RM17.4mil). EBIT margin edged up to 5.7% in 3QFY20 from 5.5% in 2QFY20.

Source: AmInvest Research - 21 Aug 2020