Results

1QFY09/14 core net profit of RM308.8m (qoq: +18.4%; yoy: +14.4%) came in within expectations, accounting for 25.1-26.1% of our and consensus full-year estimates.

Deviations

None

Dividends

None

Highlights

YoY. 1QFY09/14 core net profit increased by 14.4% to RM308.8m mainly on strong sales volumes for fatty acids and specialities products in the European market, which boosted core operating profit at the manufacturing division by 62.1% to RM114m. Despite better showing at the refining segment, operating profit at the plantation division declined by 4.8% to RM256.1m, due mainly to lower selling prices and higher production cost of both CPO and rubber.

QoQ. Although revenue increasing by only 3.3% to RM2.5bn, 1QFY09/14 core net profit increased by 18.4% to RM308.8m mainly on the back of stronger contribution from the plantation division (which in turn was driven by improved sales volume and PK price). Core operating profit at the manufacturing division improved by 8.7% mainly on the back of improved results from European operations.

Risks

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Forecasts

Maintained, pending further update with management. Our CPO price assumptions are RM2,700/tonne for FY14 and FY15.

Rating

(Sell – Under Review)

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

We are maintaining our SOP-derived TP of RM21.37 (see Figure 4) for now, pending a review in our valuation methodology for KLK’s property division (we believe the true value of KLK’s property landbank has yet to be reflected in our valuation). Our SOP-derived TP (hence our recommendation) for the stock will likely be revised upwards upon a revision in our valuation methodology for its property development landbank.

Source:Hong Leong Investment Bank Research - 20 Feb 2014