- Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with an unchanged fair value of RM25.10/share. Our fair value implies an FY16F PE of 25x.

- KLK’s core 1HFY15 results were below our forecast and consensus estimates. We have reduced KLK’s FY15F EPS by 14.3% to account for a weaker plantation profit margin. KLK’s 2QFY15 net profit included other operating income of RM90.6mil.

- We believe that the other operating income consisted mainly of gains on disposals of a subsidiary and land and increased dividends from Synthomer PLC, which is 19.7% owned by KLK.

- Manufacturing EBIT declined by 53.5% from RM222.5mil in 1HFY14 to RM103.6mil in 1HFY15 in contrast to the 5.9% YoY increase in revenue. EBIT margin eased from 8.1% in 1HFY14 to 3.5% in 1HFY15 as selling prices of fatty alcohol faced stiff competition from synthetic chemicals.

- Comparing 2QFY15 against 1QFY15 however, manufacturing EBIT improved by 94.7% to RM68.4mil. Operating margin rose from 2.5% in 1QFY15 to 4.5% in 2QFY15. Revenue of the division expanded by 6.3% QoQ to RM1.5bil in 2QFY15.

- Plantation EBIT shrank by 26.4% YoY to RM401.2mil in 1HFY15 due to lower CPO price and production. We believe that KLK’s production costs per tonne were also higher in 1HFY15 compared with 1HFY14.

- FFB production eased by 3.6% YoY in 1HFY15 due to lagged impact of the dry weather, which took place in Peninsular Malaysia in early-2014. Average CPO price realised shrank by 9.3% from RM2,392/tonne in 1HFY14 to RM2,170/tonne in 1HFY15.

- KLK’s production costs ex-mill are expected to rise from RM1,197/tonne in FY14 to a range of RM1,300/tonne to RM1,400/tonne in FY15F due to higher fertiliser costs. Fertiliser costs are anticipated to increase by more than 10% YoY in FY15F.

- On a quarterly basis, KLK’s plantation EBIT contracted by 33.6% to RM160.1mil in 2QFY15. FFB production slid by 13.5% QoQ in 2QFY15. The weather was dry in Sabah in 2QFY15.

- Average CPO price realised edged up 3.5% from RM2,138/tonne in 1QFY15 to RM2,212/tonne in 2QFY15. KLK’s average CPO price realised is lower than MPOB’s (Malaysian Palm Oil Board) spot prices due to its operations in Indonesia.

Source: AmeSecurities Research - 21 May 2015