- 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 25.2x.

- KLK’s FY15 core net profit was within our forecast and consensus estimates. After a decent net profit of RM246.9mil in 3QFY15, KLK’s net profit normalised to RM186.3mil in 4QFY15. KLK’s performance in 3QFY15 was boosted by a dividend income of RM53.4mil from Synthomer PLC. KLK owns 19.7% of Synthomer.

- Interestingly, KLK recorded a forex gain of RM61.1mil in FY15 compared with other plantation companies, which recorded forex losses. The forex gains came from the repayment of USD advances by an overseas subsidiary.

- KLK has declared a final gross DPS of 30 sen in 4QFY15, which brings total gross DPS to 45 sen in FY15 (FY14: 55 sen). This implies a dividend yield of 2.0%. We have assumed a gross DPS of 50 sen in FY16F, which translates into a yield of 2.2%.

- KLK’s plantation EBIT declined by 22.5% from RM1.0bil in FY14 to RM780.3mil in FY15 due to lower CPO price and a higher cost of production. EBIT margin contracted from 17.9% in FY14 to 10.0% in FY15. We believe that KLK’s production cost per tonne in Malaysia ranged between RM1,200 and RM1,300 in FY15, while in Indonesia, the production cost per tonne was roughly RM1,400 to RM1,500.

- KLK’s FFB production rose by 1.9% in FY15. Like the other plantation companies, KLK’s FFB yield was affected by unfavourable weather patterns. We have assumed a 1.2% increase in KLK’s FFB output in FY16F. Average CPO price realised eased from RM2,396/tonne in FY14 to RM2,106/tonne in FY15. Average CPO price realised edged down from RM2,126/tonne in 3QFY15 to RM1,960/tonne in 4QFY15. We believe that KLK’s average CPO price realised in Indonesia declined in 4QFY15 due to the imposition of the CPO export levy of US$50/tonne.

- Manufacturing EBIT (mainly oleochemicals) shrank by 24.0% from RM288.1mil in FY14 to RM218.9mil in FY15. EBIT margin contracted from 5.1% in FY14 to 3.5% in FY15. The division did not perform well in FY15 due to competition from synthetic chemicals, a slowdown in China’s economy, which affected KLK’s operations in the country, and a translation loss in Europe resulting from the unpegging of the Swiss Francs from the Euro.

- On a quarterly basis, manufacturing EBIT contracted by 37.0% to RM44.6mil in 4QFY15 due to an unrealised loss of RM76.3mil on derivative contracts. EBIT margin slid from 4.4% in 3QFY15 to 2.6% in 4QFY15. KLK’s balance sheet is healthy. Net gearing was comfortable at 26.0% as at end- September 2015.