Results

Weaker-than-expected  results.  FY09/14 core net profit of RM985.8m  (+10.2%)  came  in  below  expectations, accounted for only 88.8% and  92.7% of consensus and our forecasts , respectively .

Deviations

Weaker-than-expected  margins  at  the  manufacturing division,  in  particularly,  the  oleochemical  sub-segment, which  incurred  a  loss  of  RM13.4m  (before  tax  level)  in 4QFY14  on  the  back  of  the  sharp  decline  in  oil  prices, which  have  in  turn  resulted  in  weak  margins  and  stock write-down.

Dividend 

Recommended  a  final  NDPS  of  40  sen,  bringing  total NDPS  for  FY09/14  to  55  sen  (translating  to  a  net  yield of 2.4%), beat our expected NDPS of 50 sen for the full -year.

Highlights 

YTD…  Despite  a  small  loss  registered  by  the manufacturing  division  in  4Q  (on  the  back  of  the  sharp decline  in  oil  prices,  which  have  resulted  in  weaker margins  and  stock  write-down)  and  weaker  property earnings,  KLK’s  FY09/14  core  net  profit  increased  by 10.2%  to  RM985.8m  thanks  to  better  performance  at  the plantation  division (which in turn was a result of higher FFB production,  lower  CPO  production  cost,  and  better  palm product prices).

QoQ…  4QFY09/14  core  net  profit  declined  by  24.1%  to RM182.8m,  due  mainly  to  the  sharp  decline  in  oil  prices, which  has  resulted  in  weaker  margins  and  stock  writedown,  hence  significantly  weaker  performance  at  the oleochemical  sub-segment.  Despite  the  lower  average palm  and  rubber  product  prices,  operating profit  at  the plantation  division  sustained  from  the  previous  quarter  and this  was  due  mainly  to  higher  palm  and  rubber  output and sales volume,  as well as lower production  cost.

Risks

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

Forecasts

• We  tweaked  our  FY09/15-17  net  profit  #p#Forecasts lower  by 0.6-1.9%,  largely  to  account  for  a  lower  EBIT  margin assumption for the manufacturing  division.  

Rating   HOLD

• 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  0.4%  to  RM20.33  after  taking into  account  of  lower  net  profit  forecasts.  Maintain  Hold recommendation  on the stock.

Source: Hong Leong Investment Bank Research - 20 Nov 2014