Results

• 9MFY06/15 core net profit of RM782.4m (-21.5%) came in below expectations, accounting for only 62.9% and 67.9% of our and consensus full-year forecasts, respectively.

Deviations

• Lower-than-expected average CPO price realized (RM2,229/mt vs. RM2,300/mt we projected) and weakerthan- expected margin at the resource-based manufacturing segment.

Highlights

• YTD… 9MFY06/15 core net profit declined by 21.5% to RM782.4m due to: (1) Margin squeeze at the manufacturing division and lower sales volume at the refinery sub-segment (which has in turn resulted in core operating profit at the division declining by 29.2% to RM420.7m); and (2) A 9.4% decline in average CPO selling price (resulting in operating profit at the palm oil division declining by 11.6% to RM702.9m).

• QoQ… Lower margin from the specialty oils and fats and the refinery sub-segments, lower sales volume from the refinery sub-segment, seasonally lower FFB production, coupled with lower average CPO selling price dragged 3QFY06/15 core net profit lower by 67.2% to RM136.6m.

Risks- downside

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

Forecasts

• FY06/15 core net profit forecast lowered by 6.4% to RM1.26bn, largely to reflect slightly lower CPO price assumption (in view of the lower-than-expected CPO selling price achieved YTD) and slightly lower EBIT margin assumption at the resource-based manufacturing division. FY06/16-17 core net profit forecasts were also trimmed by 2.8-3% mainly to reflect slightly lower EBIT margin assumption at the resource-based manufacturing division.

Rating

HOLD

Positives

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

Negatives

• Pricey valuations.

Valuation

Post earnings forecasts revision, SOP-derived TP is lowered by 1% to RM4.14. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 15 May 2015