• KLK’s 1Q18 net earnings was in-line with ours and consensus estimates.

• On qoq basis, PBT increased 15.9% to RM441.5m, whilst revenue was marginally higher at RM5.193bn mainly due to better margins from manufacturing segment.

• On yoy basis, revenue and PBT were lower by 5.5% and 6.5% respectively, on account of lower ASP of CPO and PK, as well as lower CPO sales volume, and contribution from property segment.

• We maintain our FY18 and FY19 earnings forecast with unchanged TP of RM26.46 (based on PER of 23x and FY18 EPS). Maintain HOLD.

Manufacturing segment margin improved.

Adjusted for the surplus of RM13.6m arising from government acquisition of land and other EI, KLK posted a lower yoy pretax profit of RM416.1m (1Q17: RM496.8m) for 1Q18. Core PBT margin was lower at 8.0% vs. 9.0% in 1Q17, which was a result of narrowing margin from plantation and property segment, as well as lower contribution from share of result from associates. Meanwhile, manufacturing margin improved to 4.6% from 2.3% in 1Q17 with stabilized raw material cost of CPKO during the period.

PBT rose 15.9% qoq

On qoq basis the increase in PBT is attributable to higher contribution from manufacturing segment. Excluding changes in fair value of derivatives contracts and impairment of RM30.9m in 4Q17, manufacturing profit increased 11.8% to RM115.9m (4Q17: RM103.7m) as margin improved to 4.6% from 4.1% due to improved margins recorded by China and Europe operations. However, weaker profit from plantation segment was mitigated by higher ASP of PK with 2.5% and 2.1% improvement in FFB and CPO production.

No change in earnings forecast. Maintain HOLD.

We maintain our FY17 and FY18 earnings forecast with unchanged TP of RM26.46 based on PER multiple of 23x (KLK’s 5- yrs average PER) and FY18 EPS. We believe KLK fundamentals remains intact as strong cash position (RM1.39/share) and lower net gearing (0.3x), plus an established downstream activities act as buffer against any potential downside risk from upstream business. KLK has the required strong financials to diversify earnings and contribute to long-term growth, if the need arises.

Source: BIMB Securities Research - 13 Feb 2018