• Overview. KLK’s reported a 52% yoy increase in core PBT of RM411.9m for 1Q21 vs. RM271.3m for 1Q20 on account of higher profit contribution from plantation segments as margin rose to 16.3% from 7.9% in 1Q20 on higher ASP realised of CPO and PK; and higher contribution from Manufacturing and Property segments, as well as higher share of results from associate and joint ventures. On quarterly basis, core PBT increased 33% mainly due to 1) better margins from plantation segment on account of higher ASP realized of CPO and PK, and higher contributions from processing and trading operations, and 2) higher margins and profits contribution from manufacturing segment on higher revenue and better margins recorded in China operations as well as higher profit contributions from both oleochemical division (+4.75% mom to RM129.2m) and other manufacturing units (>100% mom to RM4.5m).
   
• Against estimates: Above. 1Q21 core net profit came-in above ours and consensus’ estimates. Higher ASP realised of CPO and PK achieved and better contributions from processing and trading operations negated the lower FFB and CPO production achieved during the period (Table 3) – as well as higher unrealised loss of RM39.0m against unrealised loss of RM27.2m in 1Q20 from changes in fair value of outstanding derivative contracts.

• Outlook. Although volatility remains present, we are optimistic on KLK’s longterm earnings growth prospect. We believe plantation segment would continue to sustain its performance given CPO price (local delivery) are currently trading above RM3,500/MT, whilst FFB production is expected to grow significantly by 13% to 4.4m tonnes in FY21. On the other hand, for manufacturing segments demand especially in oleochemical products i.e., serving the household and personal care products such as detergents, soaps and sanitisers is expected to continue to be satisfactory given increase in hygiene concerns worldwide.

• Our call. No adjustment was made to our earnings forecast. We maintain HOLD with unchanged TP of RM23.10, pending a review, based on P/B of 2.23x and historical 3-years average BV/share of RM10.36.

Source: BIMB Securities Research - 18 Feb 2021