• Overview. KLK’s 3Q20 core PBT increased 79% yoy to RM289m mainly due to higher profit contribution from plantation segments as margin rose to 14.7% from 2.9% in 3Q19 on higher production, sales volume, and improvement in selling price realised of palm products and higher contributions from processing and trading operations. Higher share of results from associate and JV of RM2.5m (+41%) and RM13m (3Q19: loss of RM1.3m) respectively also aided to the better performance. On quarterly basis, core PBT increased 3% mainly due to 1) higher margins from plantation segment on higher sales volume and lower CPO production cost, and 2) better margins from manufacturing segment.
   
• Key highlights. Adjustment on core profit is after taking into account the foreign exchange gain of RM199.3m in 3Q20 against RM29.6m in 3Q19 and a loss of RM178.1m in 2Q20 on loans denominated in foreign currency, as well as recognition of RM145.3m in 3Q19 on provision for impairment of estate in Liberia.

• Against estimates: Above. 9M20 core profit was above our estimates but within consensus’ estimates. Higher ASP of PO achieved and better contributions from processing and trading operations negated the higher costs of CPO production that was due to lower FFB production (Table 2 and 3) – hence, improving plantation margin to 10.0% from 5.8% in 9M19. Higher share of result from associate also contribute to the impressive results.

• Outlook. We remain optimistic on KLK’s long-term earnings growth prospect although weak production and higher costs are expected to continue to be a risk to KLK’s earnings in the near term.

• Our call. Maintain HOLD with new TP of RM23.10 (RM22.80 previously) based on FY21’s P/B of 2.23x and historical 3-years average BV/share of RM10.36. Given the current prospect of improved palm product prices and recovery in demand, we tweaked our FY20 and FY21 earnings forecast higher to RM816m and RM863m respectively from RM673m and RM843m previously.

Source: BIMB Securities Research - 21 Aug 2020