• KLK’s FY18 PATAMI slipped 25% to RM753.3m whilst revenue was down by 12% to RM18.4bn.

• Core profit trailed our estimates at 74% on lower operating profit, higher finance costs as well as lower contribution from share of results of associates.

• Margins was lower at 4.1% mainly due to narrowing margins from plantation segment as a result of lower ASP realized as well as from property segment.

• Given tougher market environment, we tweaked lower our FY19 and FY20 earnings forecast with new Target Price of RM24.25 from RM25.50 previously.

Earnings below expectation

Overall, results were below ours and consensus’ estimate. KLK posted a lower core profit of RM749m in FY18 vs. RM1.07bn in FY17. The lower profit was due to lower contribution from plantation segment and property segment added by higher finance costs, as well as lower contribution from associate. On the other hand, manufacturing margin improved to 3.7% from 1.4% on account of lower raw materials costs and higher sales volume during the period. Oleo-chemical operations performed better with higher capacity utilisations and efficiency to bring substantial profit of RM368m (FY17: RM116m).

Lower ASP of palm products

On qoq basis, net profit fell 28% to RM101m on account of lower revenue of RM4.19bn (-3% qoq). This was due to the effect of lower ASP of CPO and PK as well as negative contributions from processing and trading operations; aided by higher unrealised forex translation loss of RM17m (3Q18: RM2.9m) on borrowings to Indonesian subsidiaries. This was also aided by lower profit of RM41.4m (3Q18: RM83.5m) from manufacturing segments as a result of the drop in selling prices and profit contribution from Europe operations as well as impairment of RM21.6m on an under-performing specialised oleo chemical plant.

Change in earnings forecast

Given the current prospect of low palm products price, we tweaked our earnings forecast lower for FY19 and FY20 to RM1bn and RM1.06bn respectively from RM1.18bn and RM1.22bn previously.

TP changed to RM24.25, maintain HOLD

Maintain Hold with new TP of RM24.25 (RM25.50 previously) on blended valuation based on average TP derived from PE of RM21.68 (applying 5-yrs ave. PER of 23x on FYE19F EPS) and P/BV of RM26.82 (applying target P/B of2.5x on BV/share of RM10.73) methodology.

Source: BIMB Securities Research - 15 Nov 2018