Highlights

• KLK’s clocked in only 1.6% growth in its 9MFY09/15 FFB production due to the lagged impact from dry weather condition in end-13, which has in turn affected FFB yield at its Sabah planted land bank. Given the YTD FFB output growth, and Hari Raya holidays in Jul-15 (which will have an impact on FFB yield), management believes its overall FFB output growth to slow to 1-2% in FY09/15 (from 3.5% in FY09/14).

• CPO production cost in FY09/15 to increase to RM1,300/tonne (from RM1,197/tonne in FY09/14), mainly on the back of higher fertilizer cost (which is denominated in US$).

• While the downstream segment may have seen its worst (evidenced by a rebound in profitability since 1QFY15), management feels that margins will likely remain low, as operating environment remains challenging.

• Capex will decline from an average of RM1bn p.a. for the last 2 years to RM600-700m in FY09/15, given the absence of significant new planting activities (which in turn was driven by regulatory issues in Liberia and Indonesia) and major investments at the downstream segment. Earnings

Forecasts

• We cut our FY09/15-17 net profit forecasts by 3.7-5%, to RM973m, RM1.07bn and RM1.17bn respectively, largely to account for a lower FFB yield assumption for FY09/15, and lower EBIT margin assumption at the downstream segment.

Catalysts

• Higher-than-expected FFB output growth;

• CPO prices strengthen further; and

• Recovery in property demand sentiment.

Risks

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

Rating

HOLD

Positives

• (1) Rising FFB contribution from estates in Indonesia; (2) Healthy balance sheet; and (3) Low property land bank cost.

Negatives

• (1) Illiquid trading volume; and (2) Pricey valuation.

Valuation

• SOP-derived TP on the stock was raised marginally (by 1.4% from RM20.17 previously) to RM20.45 as we updated our valuation parameters (including net debt, latest market price of Yule Catto, and exchange rate). Maintain HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 30 Jul 2015