KFima recorded a +9.6% y-o-y revenue increase for 2QFY13 to RM127.8m from RM116.6m in the previous corresponding year. Net profit slipped marginally to RM19.0m (-8.2% y-o-y, +12.4% q-o-q) attributed to lower revenue from palm oil production and processing coupled with declining CPO prices, dampening profit margins. The group‟s YTD performance is in line with our FY13F estimates (9MFY13 YTD 55% revenue, 48% net profit) despite headwinds experienced in the respective divisions. Our Outperform recommendation with TP of RM3.21, implying forward 5.8x PE multiple is derived by our sum-of-parts valuation with conservative PE multiples for the respective segments.

Manufacturing (+4.1% y-o-y, +4.6% q-o-q) and bulking (+6.3 y-o-y, +13.4% q-o-q) revenues are stable. KFima‟s first and third largest revenue and earnings contributors are expected to maintain previous year‟s performance with slight growth as i.) manufacturing volume increases, but average margin is reduced due to different product mix‟s margin yields, ii.) higher throughput from increased utilisation (current utilisation – 80%) of tanks for mainly edible oil and base oil product. By FY2014, the group will build new storage tanks for extra capacity which would translate to RM2m-RM3m in extra earnings per month for the division.

Unpredictable CPO prices. The plantation division is earning good profit margins (27% for this quarter) but due to lower CPO prices however, the “optimum” historical highs were not met. KFima‟s Indonesian subsidiary moreover only sold 19,939mt of CPO YTD with no crude palm kernel oil (CPKO) compared with 19,813mt CPO and 2,489mt of CPKO sold last year. Average net CIF selling price of CPO decreased -15.6% to RM2,421/mt from RM2,869/mt YTD causing the shortfall for the division. KFima has actually sold more CPO this year, but as profit is purely determined by CPO‟s market price, the outlook of this division depends on a favourable price scenario. The group continues to acquire palm oil lands which would expand the division‟s contributions in the near-term.

Canned tuna to take-off by 1QFY14. The division is taking on new tuna canning orders from Europe. By 1QFY2014, RM6m to RM7m of revenue is expected, with potential RM20m sales per quarter as of 4QFY14 onwards (operating at c. 30% capacity). We are estimating additional c.80% revenue for the group based on these new orders.

Still undervalued. For FY13F, KFima's forward PE multiple of 6x, for a 5 welldiversified core business entity is regarded as a discount. We believe the group remains undervalued considering they are i.) meeting earnings expectations, ii.) undertaking exciting plans to grow its tuna manufacturing operations in Papua New Guinea by 2014, expanding bulking storage and new plantation acquisitions, iii.) hold a healthy cash pile exceeding RM250m for acquisition and/or expansion.

Source: PublicInvest Research - 30 Nov 2012