-  Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM24.85/share. KLK’s core 1QFY14 results were in line with our expectations.

-  In spite of this, we have raised KLK’s FY14F earnings forecast to account for the RM816.8mil net gain on disposal of the Senai land to UEM Sunrise Bhd. We have also adjusted for stronger-than-expected manufacturing profits, which were offset by a decline in property earnings.

-  KLK’s core net profit improved by 6.1% YoY to RM276.9mil in 1QFY14 on the back of the manufacturing division.

-  Plantation EBIT shrank by 4.8% YoY to RM256.1mil in 1QFY14 due to lower CPO price realised and a fall in FFB production. EBIT margin of the plantation division edged down from 23.1% in 1QFY13 to 21.4% in 1QFY14. -  FFB production fell by 7% YoY to one million tonnes in 1QFY14 partly due to the high base effect in 1QFY13. On a QoQ basis, FFB output improved by 8.9% in 1QFY14.

-  Average CPO price realised was RM2,291/tonne in 1QFY14, 4.3% weaker than the average price of RM2,395/tonne achieved in 1QFY13.

-  KLK’s average CPO price realised in 1QFY14 was 8.4% below MPOB’s (Malaysian Palm Oil Board) average spot price of RM2,500/tonne as the group has a significant exposure to Indonesia.

-  About a third of KLK’s palm oil production is from Indonesia. CPO prices in Indonesia are generally lower than Malaysia due to infrastructure costs and export taxes.

-  Manufacturing EBIT strengthened by 23.4% to RM82.1mil

in 1QFY14 as turnover expanded by 13.9%. EBIT margin edged up from 6.0% in 1QFY13 to 6.5% in 1QFY14.

-  We believe that the improvement in the manufacturing division’s EBIT margin was due to the low cost of feedstock, which was locked in earlier.

-  Property EBIT fell by 32.2% to RM12.9mil in 1QFY14 due to a decline in progress billings. Going forward, we believe that property earnings would remain soft due to fewer property launches.

-  KLK’s property earnings are mainly driven by the Bandar Sri Coalfields residential development project, which commands a GDV of RM4.2bil. Revenue of the division slid by 50.5% YoY to RM27.4mil in 1QFY14 while EBIT margin improved from 34.3% in 1QFY13 to 47.0% in 1QFY14. 

Source: AmeSecurities