- Maintain HOLD on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM23.90/share. Our fair value implies an FY15F PE of 27x.

- KLK’s annualised 1QFY15 results were 9% below our forecast and 22% short of consensus estimates. In spite of this, we are keeping our earnings estimates for now.

- In the results announcement, KLK said that plantation earnings and group net profit would be lower in FY15F compared with FY14.

- Included in KLK’s 1QFY15 net profit was a foreign exchange gain of RM20.3mil. This was offset by a loss on derivatives of RM29.5mil.

- KLK’s net profit rebounded QoQ in 1QFY15 as manufacturing earnings recovered. KLK said that oleochemical margins improved while the European units chalked in better performances.

- Manufacturing division recorded an EBIT of RM35.1mil in 1QFY15 compared with a loss of RM9.4mil in 4QFY14 and a profit of RM82.1mil in 1QFY14. Recall that KLK’s manufacturing division recorded inventory write-downs of RM16.3mil in 4QFY14 and RM28.2mil in FY14.

- Comparing 1QFY15 against 1QFY14, manufacturing EBIT margin shrank from 6.5% to 2.5% as fierce competition from synthetic alcohol exerted pressure on selling prices of fatty alcohol. The fall in crude oil prices has made synthetic alcohol very competitive.

- KLK recorded a 5.0% YoY decline in FFB production in 1QFY15. On a quarterly basis, KLK’s FFB output shrank by 5.8% in 1QFY15. We believe that the group was affected by the lagged impact from the dry weather in Peninsular Malaysia, which took place in early-2014.

- KLK has more planted areas in Peninsular Malaysia compared with Sabah. KLK’s planted areas in Peninsular Malaysia amounted to 52,155ha while in Sabah, planted areas totalled 38,113ha.

- Plantation EBIT declined by 5.9% YoY to RM241.1mil in 1QFY15. EBIT margin of the division slid from 21.4% in 1QFY14 to 13.4% in 1QFY15. KLK was affected by lower CPO price and higher production costs in 1QFY15. Average CPO price realised was RM2,138/tonne in 1QFY15 versus RM2,291/tonne in 1QFY14.

- Comparing 1QFY15 against 4QFY14, plantation earnings rose by 2.4% as the group’s refineries and kernel crushing plants swung into the black. This was mainly driven by unrealised gains from changes in fair value of derivative contracts.

Source: AmeSecurities