Results

9MFY09/13 core net profit of RM633.7m (-15.9%) came in below expectations, accounting for only 62.1% and 63.5% of our and consensus full-year estimates, respectively.

Deviations

• Lower-than-expected average CPO price achieved; and
• Higher-than-expected production costs.

Highlights

QoQ. 3QFY09/13 core net profit declined by 4% qoq to RM187.2m as improved performance at the property segment and lower effective tax rate were more than offset by weaker performance at the plantations segment, which in turn was dragged by seasonally lower production, lower sales volumes and higher production cost.

YTD. 9MFY09/13 core net profit declined by 15.9% to RM633.7m on lower palm and rubber prices (which fell by 20.4 and 34.5%, respectively) and the absence of earnings contribution from the retailing segment. All these more than offset a sharp improvement in the manufacturing and property divisions, which were boosted by: (1) Higher sales volumes of fatty acids and fatty alcohols and lower raw material price that boosted profitability at the manufacturing division ; and (2) Commendable take ups for the 8 property launches in Bandar Seri Coalfields last year.

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

FY13-15 net profit forecasts lowered by 9.1%, 3.9% and 4% respectively, largely to reflect lower CPO price assumption in FY13 (after taking into account of the realized price in 9MFY09/13), slightly higher production cost assumption at the plantations segment and lower rubber selling price assumptions.

Rating

Sell

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.

Positives – (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Stable property earnings for the next two years.

Valuation

SOP-derived TP lowered by 3.3% to RM18.17 to reflect the downward adjustment in our earnings forecasts and its latest net debt position. We downgrade KLK from Hold to Sell as downside is now more than 10% following the downward revision in our TP.

Source:Hong Leong Investment Bank Research- 21 Aug 2013