Results

1HFY09/12 core net profit of RM459.8 came in below expectations, accounting for only 40.9% and 36.3% of our and consensus full-year estimates.

Deviations

• Lower-than-expected average CPO price achieved (RM2,271/mt vs. our assumption of RM2,500/mt); and
• Higher effective tax rate of 22% vs. 20% we assumed.

Highlights

QoQ. 2QFY09/13 core net profit declined by 27.8% to RM195.1m and the sharp decline was due mainly to: (1) Lower plantation earnings (which in turn was due to lower selling prices for both rubber and palm products, seasonally lower FFB production and higher production cost); and (2) Lower property earnings (which we believe is due to seasonal effects). Within the manufacturing division, earnings at the oleochemical sub-segment rose 33.6% to RM86.6m, thanks to increased sales volume of fatty alcohol products and lower raw material prices (which in turn boosted profitability).

YTD. 1HFY09/13 core net profit declined by 19.6% to RM459.8m, dragged by lower rubber and palm product prices as well as the absence of earnings from the retailing division, which altogether more than offset better performance at the manufacturing and property divisions.

Risks

(1) Earlier-than-expected recovery in the world’s major economies, resulting in better edible oil demand and prices; and (2) Weather uncertainties revisit, which would in turn result in edible oil supply distortion, hence boosting edible oil prices.

Forecasts

FY13 net profit forecast lowered by 9.1% to reflect lower CPO price assumption (after taking into account of the realized price in 1HFY09/13) and a slightly higher effective tax rate assumption.

Rating

HOLD

• Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Stable property earnings for the next two years.
• Negatives – (1) Illiquid trading volume; and (2) Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO

Valuation

• TP lowered by 3.4% to RM18.79 (based on SOP) to reflect its latest net debt position. We note that the downward adjustment in our FY13 net profit forecast does not result in changes to our TP, which is based on CY2014 earnings.

Source: Hong Leong Investment Bank Research - 23 May 2013