• KLK’s 1H17 net earnings of RM650m was in-line with ours and consensus’ estimates.

• Excluding RM485.7m surplus from sale of plantation land to associate in 1Q16, PBT grew 30% yoy to RM868m vs. previous year’s RM668m, mainly due to higher profit contribution from plantation and properties segments.

• Plantation profit increased 79% yoy to RM737.8m due to better ASP of CPO and PK.

• We maintain our BUY recommendation with TP of RM26.58 based on PER of 23x and FY17 EPS.

Better margins from plantations segment.

Adjusted for the surplus of RM485.7m arising from the sale of plantation land in 1Q16, KLK posted a higher yoy pretax profit of RM868m (1H16: RM668.4m). The higher profit is attributable to its plantation segment which posted a better margin of 12.8% (1H16: 9.6%) as profit surged to RM737.8m (+79% yoy), offsetting the impact of lower profit from manufacturing division. The property division also posted higher profit of RM17.1m (1H16: RM4.3m) as revenue increased more than triple to RM83.1m.

Manufacturing segment dragged core PBT margin lower.

KLK’s 1H17 core PBT margin was slightly lower at 7.9% vs. previous year’s 8.3% mainly due to narrowing margins from manufacturing segment, as well as loss in share of result from Joint-Venture. Despite an increase in revenue by 37% to RM4.97bn, manufacturing segment profit declined 64% yoy as the increase in cost of raw materials (CPKO) had squeezed margin. Margin was also impacted by lower unrealized gain of RM4.1m incurred during the period (1H16: unrealized gain of RM23.6m) due to fair value changes on outstanding derivatives contracts.

We expect that business performance in the 2H17 to be better, underpinned by 1) better FFB and CPO production plus committed forward sales; and 2) better margin for manufacturing sector - favorable raw material prices.

No change in earnings forecast. We maintain our earnings forecast for FY17 and FY18 respectively. Hence, maintain BUY with TP of RM26.58 based on PER multiple of 23x (KLK’s 5-yrs average PER) and FY17 EPS. An interim single tier dividend of 15sen was declared which is in line with last year’s payment.

Source: BIMB Securities Research - 23 May 2017