• KLK’s FY17 net earnings came-in below ours and consensus’ estimates – making up 93% of our full year forecast.

• Its FY17 core profit missed our estimates on higher effective tax rate, higher finance costs as well as loss in share of results of joint-ventures.

• Core PBT margin maintained at 7.3% mainly due to higher margins from plantation segments.

• We maintain our HOLD recommendation with TP of RM26.46 based on PER of 23x and FY18 EPS.

Banking on plantations segment

Adjusted for the surplus of RM485.7m arising from the sale of plantation land in FY16 and other EI, KLK posted a higher yoy pretax profit of RM1.5bn (FY16: RM1.2bn) for FY17. The higher profit is attributable to its plantation segment which posted a higher margin of 12.1% (FY16: 9.0%) as profit surged to RM1.3bn (+56% yoy). The property division posted higher profit of RM40.5m (FY16: RM28.6m) on higher revenue of RM141.5m – margin improved to 28.6% from 25.9% in FY16.

Hiccup in manufacturing segment

KLK’s core PBT margin was maintained at 7.3% mainly due to narrowing margins from manufacturing segment, as well as higher finance costs of RM169.8m (+8% yoy) and loss of result of joint-ventures of RM17.3m (FY16: gain of RM4.1m). Despite an increase in Group’s revenue by 27% to RM21.0bn, manufacturing segment profit shrank 59% yoy as the increase in cost of raw materials had squeezed margin. This was also contributed by 1) sharp drop in CPKO price that had triggered the stocks writedown of RM60.3m in 3Q17, and 2) impairment of RM30.9m on an under-performing specialized oleochemical plant. This resulted in the decline in oleo-chemical and other manufacturing units’ profit by 61% and 22% respectively to RM115.5m and RM18.5m.

Core PBT for 4Q17 rose 89% qoq (56% yoy)

On qoq basis the increase in PBT is attributable to higher profit from all segments; plantation, manufacturing and property segment. Plantation profit increased 26% to RM286.1m due to increase in FFB production and drop in cost of production. This was also aided by higher profit from property segment of RM20.9m (3Q17: RM2.5m) as revenue increased significantly to RM44.4m (3Q17: RM14.0m).

Source: BIMB Securities Research - 23 Nov 2017