• BAK’s FY18 core profit declined 29% to RM462.4m as revenue fell 12% to RM18.97bn. Margin was squeezed by lower ASP of palm products and negative contribution from processing and trading operations in plantation segment.

• Lower profit contribution from property segment with the recognition of developments profits from a particular phase that has lower gross margin also aided to the declining Group’s profit.

• Overall, net profit came in below our expectation making up only 78% of our full year forecast. Contribution from KLK is also below our expectation.

• We revised our earnings forecast lower for FY19 and FY20 with new TP of RM17.28 from RM19.05 previously. Maintain HOLD.

Results below expectation.

Overall, Batu Kawan’s results were below our forecast. Plantation segment saw a lower profit of R727.7m vs previous year’s RM1.33bn, as margins were narrower at 9.2% (FY17: 12.4%) due to lower ASP realised of CPO and PK, as well as negative contribution from processing and trading operations. Profit was also impacted by net unrealised foreign exchange translation loss of RM85.26m (FY17: RM4.04m loss) on loans advanced and bank borrowings to Indonesia’s subsidiaries. Contribution from KLK is also below our expectation (refer accompanying report on KLK). However, manufacturing margin improved to 4.8% from 2.6% in FY17 on account of lower raw materials costs and higher sales volume.

Weakness in palm product price

On qoq basis the decline in PBT is attributable to lower profit from plantation and manufacturing segments. Plantation’s profit shrunk 3% to RM129.9m due to lower ASP of CPO and PK while manufacturing profit contracted 46% to RM65.2m (3Q18: RM20.1m) mainly due to the decline in selling prices as well as lower margin. Additionally, there is also an impairment of RM21.6m on under-performing specialised oleo chemical plant and RM4.63m impairment of PPE and increase in unit production cost. On the other hand, property segment’s profit increased more than 100% to RM21.2m in tandem with the increase in revenue of RM71.53m (3Q18: RM50.57m) while Investment holdings/Others segments reported a loss of RM17.8m (3Q18: RM6.5m profit) on account of lower dividend income of RM16.7m from overseas investments, Synthomer plc and M.P. Evans Group.

Revised forecast, maintain HOLD

We revised lower our FY18 and FY19 earnings forecast to RM577m and RM641m respectively from RM639m and RM661m previously as we adjust our margins lower. Hence, our TP is revised to RM17.28 (RM19.05 previously) based on FY19’s EPS and PER of 12x (2-year average PER).

Source: BIMB Securities Research - 15 Nov 2018