Results

9MFY09/14 core net profit of RM825m (+30.2%) came in below expectations, accounted for only 65.2-69.4% of our and consensus full-year forecasts.

Deviations

Lower-than-expected average CPO selling price (YTD, KLK achieved average CPO selling price of RM2,430/mt vs. RM2,700/mt we assumed).

Lower-than-expected property earnings.

Highlights

YTD… 9MFY09/14 core net profit grew by 30.2% to RM825m mainly on: (1) higher palm product prices and FFB production and lower CPO production cost (which altogether resulted in plantations segment operating profit rising by 35% to RM774.5m; and (2) higher sales volume and selling prices, coupled with improved performance from European operations, which have collectively resulted in manufacturing core operating profit rising by 24.5% to RM283m.

QoQ… 3QFY09/14 core net profit declined by 10.3% to RM241m mainly on the back of: (1) a 14.7% decline in the plantation segment’s operating profit arising from losses at the refineries and kernel crushing plants, which more than offset higher FFB production and lower production cost; and (2) a 33.4% decline in core operating profit at the manufacturing segment arising from higher production cost and lower sales volume.

Risks

• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Forecasts

We are taking this opportunity to lower our FY09/14-16 net profit forecasts by 16%, 21.9% and 19.1% respectively, largely to account for lower average CPO price assumption (FY14: RM2,400/mt; FY15-16; RM2,300/mt), and lower property earnings 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; and (2) Healthy balance sheet.

Valuation

SOP-derived TP lowered by 11.7% to RM20.41 after taking into account of lower net profit forecasts and the roll-forward of our base year valuation from CY2015 to CY2016. Downgraded from Hold to Sell.

Source: Hong Leong Investment Bank Research - 21 Aug 2014