• BKawan’s 1Q18 net profit of RM177.9m came in-line with our expectation mainly on higher margin from manufacturing segment and share of result from associate and JV of RM2.9m and RM4.8m respectively (1Q17: RM2.2m and loss of RM3.8m).

• Core PBT margin slightly lower at 8.8% from 9.5% recorded last year mainly due to lower margins from plantation and property development segments. Contribution from KLK is within our expectation.

• We maintain our FY18 and FY19 earnings forecast with HOLD recommendation and TP of RM20.39.

Earnings within expectation…

Overall, Batu Kawan’s result was within our forecast. Net profit of RM177.9m in 1Q18 increased 22.7% qoq but was lower by 9.9% yoy. This was mainly attributed to plantation and property segment that saw margin squeezed to 10.7% and 9.7% respectively from 14.3% and 26.4% yoy. Plantation segment recorded lower profit of RM276m (-35.8% yoy) resulting from lower production as well as weaker ASP of CPO and PK whilst property segment registered a drop in profit to RM1.7m (1Q17: RM15.9m) in-line with the 70.3% drop in revenue to RM17.9m.

…Thanks to manufacturing segment

Manufacturing and other segment posted a higher profit of RM178.1m (1Q17: RM53.8m) and RM30.9mm (1Q17: RM13.9m) respectively in 1Q18 as margins rose to 6.8% and 26.8% (1Q17: 2.2% and 10.2%). Manufacturing segment saw a higher profit of RM178.1m due to improved margins as cost of raw materials stabilised, as well as higher contribution from chemicals division resulting from higher selling price and addition of new customers. The significantly improved manufacturing profit was also aided by unrealized gain of RM25.4m (1Q17: loss RM27.4m) from fair value changes on outstanding derivatives contracts. Contribution from KLK is within our expectations (refer accompanying report on KLK).

Investment and other segment.

Surplus of RM13.62m arising from government acquisition of land and contribution from joint-venture and associate of RM6.8m also contributed to the higher gain from this segment (1Q18: RM30.9m; 1Q17:RM13.9m).

Source: BIMB Securities Research - 13 Feb 2018