-  Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM24.85/share. Our fair value implies an FY15F PE of almost 22x.

-  KLK’s core 9MFY14 results were below our expectations and consensus estimates. We have reduced KLK’s FY14F earnings forecast by 3.4% to account for erosions in EBIT margin experienced by the plantation and manufacturing divisions in 3QFY14.

-  In its results announcement, KLK said that China’s demand for palm oil will be affected by tougher measures imposed on granting of letters of credit.

-  In 3QFY14 also, KLK recorded an impairment of RM19.8mil in respect of its investments in Papua New Guinea (PNG). We think that part of the impairment represented the amount of money that KLK was unable to claim from the vendor.

-  Recall that in May 2014, the National Court of PNG declared two of KLK’s land leases measuring 38,350ha as null and void.

-  Comparing 3QFY14 against 2QFY14, KLK’s plantation EBIT declined by 20.5% to RM229.8mil dragged by negative contribution from the refineries and kernel crushing plants. Refining accounted for 6.4% of KLK’s plantation EBIT in FY13.

-  Manufacturing EBIT fell by 51.7% QoQ to RM66.5mil in 2QFY14 due to higher production cost. We reckon that KLK’s manufacturing division had finally felt the impact of 2QFY14’s higher palm prices in 3QFY14. EBIT margin slid from 9.2% in 2QFY14 to 4.6% in 3QFY14.

-  In terms of selling price, KLK’s average CPO price was RM2,430/tonne in 9MFY14, 7.1% stronger than the average price of RM2,268/tonne achieved in 9MFY13.

-  On a QoQ basis, KLK’s average CPO price inched up from RM2,499/tonne in 2QFY14 to RM2,507/tonne in 3QFY14. We believe that the price differential between KLK’s CPO in Malaysia and Indonesia narrowed in 3QFY14.

-  KLK’s FFB production rose 1.3% YoY in 9MFY14. Palm production was affected by unfavourable weather in 2QFY14. Comparing 3QFY14 against 2QFY14, KLK’s FFB output rose 3.7% to 873,104 tonnes.

-  Property EBIT contracted by 44.8% to RM31.6mil in 9MFY14 due to a fall in the number of property launches. KLK’s property earnings are mainly driven by the Bandar Sri Coalfields residential development project.

Source: AmeSecurities