Results

9MFY06/14 core net profit of RM990.4m (+11.5%) came in below expectations, accounted for only 63.2% and 66% of our and consensus full-year forecasts.

Deviations

Weaker-than-expected average selling price realized for CPO (RM2,459/tonne vs. RM2,700/tonne we assumed), and higher-than-expected interest expense.

Dividends

None

Highlights

YTD… 9MFY06/14 core net profit increased by 11.5% to RM990.4m mainly due to higher contribution from the resource-based manufacturing segment (which was in turn partly moderated by lower contribution from the plantation segment). Operating profit at the plantation segment fell by 5.5% to RM803.3m as higher palm product prices (but still fell short of our assumption) were more than negated by higher operating and replanting costs. Operating profit contribution from the resource-based manufacturing segment, on the other hand, rose 45.4% to RM656.2m thanks to margin expansion from all sub-segments, coupled with higher sales volume from the olechemical sub-segment.

QoQ… 3QFY06/14 core net profit fell 24.7% to RM291.2m mainly due to higher feedstock cost (which in turn resulted in weaker profitability at the refinery and oleochemical subsegments) and weaker associate earnings.

Risks - downside

• Recovery in global vegetable oil production may result in a sharp plunge in vegetable oil prices;
• Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil); and
• Escalating CPO production cost.

Forecasts

We trimmed our FY06/14 core net profit forecasts by 4.4% to RM1.5bn, after taking into account of the realized average CPO price and higher interest cost in our forecast. FY06/15-16 nudged up marginally, as higher margin assumption at the manufacturing segment was more than offset higher interest cost assumptions.

Rating

HOLD

Positives – (1) Improved demand outlook for CPO; (2) Decent balance sheet; and (3) Strong cash flow generation ability.

Negatives – Pricey valuations.

Valuation

SOP-derived TP raised by 6.1% to RM4.88 (see Figure 5), after taking into account of: (1) higher earnings forecast in FY06/14-15; (2) latest share price of listed associate (Bumitama); and (3) latest issued shares. Maintain Hold recommendation on the stock.

Source: Hong Leong Investment Bank Research - 23 May 2014