• Overview. 3Q19 core PBT dropped 26% yoy to RM173m as revenue fell by 14% to RM3.7b on lower ASP realised of palm products and contribution from associates. On qoq basis, core profit declined 7% on the effect of lower ASP of palm products, drop in CPO and PK sales volume as well as increase in cost of production.

• Key highlights. 3Q19 saw both manufacturing and property segment posted yoy and qoq increase in profit (manufacturing 16% yoy and 6% qoq; property development: 33% yoy and 55% qoq) to RM99.0m and 11.0m respectively.

• Against estimates: below. 9M19 core profit was below ours and consensus’ estimates at 53%/59% of full year forecast. Weak ASP of palm products negated the increase contribution from processing and trading operations in plantation segment, and higher sales volume and better margin in manufacturing segment for Malaysia and China operation.

• Outlook. We had anticipated that plantation companies were at risk of earnings disappointment as palm product prices were expected to remain under pressure with limited upside seen in 2019/20. Following this results, we tweaked our FY19 and FY20 earnings lower to RM634m (-24%) and RM724m (-23%) respectively as we adjusted our ASP of palm products, costs and plantation’s margin.

• Our call. Maintain HOLD with slight adjustment in TP of RM23.80 from RM23.34 previously based on target P/B of 2.22x and BV/share of RM10.73. We changed our valuation methodology (from blended valuation based on average TP derived from PE and P/B) to P/B ratio as we believe this method better reflect KLK’s fundamentals.

Source: BIMB Securities Research - 21 Aug 2019