• KLK’s 1Q19 core profit of RM155.7m was below ours and consensus estimates.

• On qoq basis, PBT increased 62.5% to RM336.4m, whilst revenue was lower at RM4.085b (-2.5%) on lower profit from plantation and property development segments.

• On yoy basis, revenue and PBT were lower by 21% and 6% respectively mainly due to lower contribution from plantation and manufacturing segments on account of decrease in ASP of palm products

• We maintain our FY19 and FY20 earnings forecast with unchanged Target Price of RM24.25. Maintain HOLD.

Earnings below expectation

Overall, results were below ours and consensus’ estimate. Adjusted for the surplus from government acquisition of land of RM22.5m (1Q18: RM13.6m), forex gain of RM38.6m (1Q18: RM31.9m) and loss in derivatives of RM41.1m (1Q18: loss of RM113.8m), KLK posted a lower core profit of RM155.7m in 1Q19 vs. RM300.8m in 1Q18. The lower profit was due to lower contribution from plantation and manufacturing segments added by slightly higher finance costs of RM43.3m (+1.7%). On the other hand, property segment‘s profit improved to RM11.1m (1Q18: RM1.7m) as revenue increased to RM39.8m supported by surplus of RM22.5m arising from government acquisition of plantation land. Please refer table 2 and 3.

Lower ASP of palm products

On qoq basis, the increase in PBT is attributable to higher contribution from manufacturing segment of RM98m (+124% qoq); cushioning the lower contribution from plantation segment (-25%) and property segment (-48%). The better results from manufacturing segment was due to higher contributions from Malaysia operations due to higher margins, as well as recognition of unrealised gain of RM21.4m (4Q18: unrealised loss of RM9.4m) arising from FV changes on outstanding derivatives contracts.

Maintain earnings forecast with unchanged TP of RM24.25

We maintain our FY19 and FY20 earnings forecast with unchanged TP of RM24.25 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. KLK has the required strong financials to diversify earnings and contribute to long-term growth with strong cash position of RM1.49/share and low net gearing of 0.26x.

Source: BIMB Securities Research - 19 Feb 2019