- We are downgrading Kuala Lumpur Kepong Bhd (KLK) from BUY to HOLD with a lower fair value of RM22.65/share. This is in accordance with the 12.5% downward revision in KLK’s FY13F earnings forecast.

- KLK’s PE band ranged from a low of 8x to a high of 33x in the past seven years. Mean PE was 20x. KLK’s FY14F PE is 21.6x currently.

- KLK’s annualised 9MFY13 core net profit was below our forecast and consensus estimates due to lower-thanexpected plantation EBIT margin.

- Bright spots in KLK’s 9MFY13 earnings were improved performances from the manufacturing and property divisions, which helped cushion weaker plantation earnings.

- Manufacturing EBIT climbed by 61.8% from RM136.7mil in 9MFY12 to RM221.2mil in 9MFY13 underpinned by low cost of raw materials.

- Prices of palm kernel oil and stearin remained soft in 9MFY13, which helped enhance the division’s margins from 3.6% in 9MFY12 to 6.4%.

- Property EBIT increased by 83.5% YoY to RM57.3mil in 9MFY13 driven by positive sales from the Bandar Sri Coalfields project in Sungai Buloh. Property EBIT margin rose from 27.5% in 9MFY12 to 35.9% in 9MFY13.

- Plantation earnings fell by 36.8% YoY to RM573.4mil in 9MFY13. Average CPO price realised was RM2,268/tonne in 9MFY13, which was 20.4% lower than the price of RM2,848/tonne achieved in 9MFY12.

- FFB production strengthened by 14.6% from 2.3mil tonnes in 9MFY12 to 2.7mil tonnes in 9MFY13.

- The increase in FFB output was due to a recovery in yields after being affected in 9MFY12 by the lagged impact of the drought, which took place in 2010.

- We estimate KLK’s FFB yield at between 22 tonnes/ha to 22.5 tonnes/ha in FY13F compared with 21.3 tonnes/ha in FY12.

- EBIT margin of the plantation division slid from 23.5% in 9MFY12 to 18.1% in 9MFY13 due to lower CPO price. We expect KLK’s production cost to hover between RM1,300/tonne and RM1,400/tonne in FY14F.

Source: AmeSecurities