-  Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM24.85/share. KLK’s core 1HFY14 results were in line with our expectations and consensus estimates. We have included the RM816.8mil gain on disposal of the Senai land, which has not been recognised in KLK’s books yet.

-  KLK recorded a core net profit growth of 29.3% YoY in 1HFY14 underpinned by the plantation and manufacturing divisions.

-  Stronger CPO price in 2QFY14 boosted plantation earnings. Plantation EBIT climbed from RM256.1mil in 1QFY14 to RM288.8mil in 2QFY14 as average CPO price realised expanded by 9.1% to RM2,499/tonne.

-  On a YoY basis however, plantation EBIT surged by 18.1% to RM544.9mil in 1HFY14. We believe that this was partly driven by contribution from KLK’s two refineries in Indonesia, which commenced operations in May and November 2013.

-  KLK recorded a negative FFB production growth of 4.8% YoY in 1HFY14 due to unfavourable weather. We have forecasted a 4% increase in KLK’s FFB output for FY14F.

-  We believe that a third of KLK’s FFB production is from its estates in Indonesia. The average age of KLK’s oil palm trees in Indonesia is about nine years old versus 15 years in Sabah and 12 years in Peninsular Malaysia.

-  Manufacturing EBIT climbed by 48% YoY to RM222.5mil in 1HFY14 as the European operations enjoyed higher profitability and lower cost of feedstock enhanced operating margins. EBIT margin inched up from 6.6% in 1HFY13 to 8.1% in 1HFY14.

-  On a QoQ basis, manufacturing EBIT rose by 71% from RM82.1mil to RM140.4mil in 2QFY14. EBIT margin remained resilient in spite of rising costs of feedstock in 2QFY14. We believe that KLK could have locked in lower cost of raw materials earlier. The division recorded an EBIT margin of 9.4% in 2QFY14 versus 6.5% in 1QFY14.

-  Property EBIT fell by 38.1% YoY to RM21.2mil in 1HFY14 due to lower number of launches. Earnings driver of the property division is the Bandar Sri Coalfields project, which commands a GDV of RM4.2bil. EBIT margin of the property unit rose from 32.2% in 1HFY13 to 43.4% in 1HFY14.

-  Going forward, KLK is expected to be more aggressive in the property development sector. The group has renamed its property subsidiary as KLK Land Sdn Bhd. KLK plans to launch its Gerbang project in Iskandar in two years’ time.

Source: AmeSecurities