Investment Highlights

• Maintain HOLD on KL Kepong (KLK) with an unchanged fair value of RM25.70/share, which is based on an FY18F PE of 25x. KLK's FY17 results were within our earnings forecast but below consensus estimates. The group has declared a final gross DPS of 35 sen, which brings total gross DPS to 50 sen for FY17. This translates into a dividend yield of 2.0% for FY17.

• KLK expects its plantation earnings to be satisfactory in FY18F. The oleochemical division is also anticipated to perform better in FY18F even though the industry is flushed with excess capacities. KLK added that management's efforts to turn around the underperforming units of the business have produced encouraging results.

• After recording a loss of RM21.9mil in 3QFY17, the oleochemical division swung into a profit of RM79.1mil in 4QFY17. The turnaround came in spite of an impairment of RM30.9mil on a specialised oleochemical plant. The enhancement in earnings in 3QFY17 was supported by a fall in raw material costs and absence of inventory write-downs. KLK recorded a RM60.3mil write-down in stocks in 3QFY17.

• Comparing FY17 against FY16, the manufacturing division (comprising mainly oleochemical activities) recorded a profit of RM134.0mil vs. RM323.2mil. EBIT margin slid from 4.8% in FY16 to 1.9% in FY17. The decline in manufacturing earnings was due to higher palm kernel oil costs, inventory write-downs and impairment on an oleochemical plant. Palm kernel oil is used to produce oleochemicals.

• Plantation EBIT expanded by 58.1% YoY to RM1.3bil in FY17 supported by higher selling prices of CPO and palm kernel. KLK's CPO production was also higher in FY17. Average realised CPO price rose by 20.5% from RM2,270/tonne in FY16 to RM2,735/tonne in FY17 while average palm kernel price increased by 34.7% from RM1,881/tonne to RM2,534/tonne.

• KLK's FFB production improved by 10.8% YoY in FY17 against - 8.1% in FY16.

• Share of earnings in the Astra Agro/KLK refining joint venture in Dumai slipped from a positive RM4.1mil in FY16 to a negative RM17.3mil in FY17. The palm refinery has been recording losses every quarter in FY17 due to negative processing margins.

• KLK's balance sheet is clean. Net gearing inched down from 24.0% as at end-June to 20.7% as at end-September 2017. About 71.5% of KLK's borrowings were denominated in MYR while another 14.2% were denominated in USD.

Source: AmInvest Research - 23 Nov 2017