Results

• FY06/15 core net profit of RM1.02bn (-18.8% yoy) missed our expectation by 17.8%. Against the consensus, the results came in within expectations, accounting for 96.6% of the consensus forecast.

Deviations

• Lower-than-expected average CPO price realized (RM2,221/mt; HLIB forecast: RM2,247/mt), lower-thanexpected FFB production (3.5m mt; HLIB forecast: 3.6m mt), and higher-than-expected net finance cost.

Dividend

• Declared 2nd interim DPS of 4.5 sen (payable on 18 Sep 2015), bringing DPS YTD to 9 sen. For the full-year, we are projecting a total DPS of 15.5 sen.

Highlights

• YTD… FY06/15 core net profit declined by 18.8% to RM1.02bn mainly on the back of: (1) An 11.5% decline in CPO price realized (which has resulted in operating profit at the plantation segment declining by 15.7%); and (2) Lower sales volume at the refinery sub-segment, coupled with margin squeeze at the manufacturing segment, which have in turn resulted in operating profit at the manufacturing segment declining by 24% to RM517.1m.

• QoQ… Core net profit improved by 75.7% to RM240m, and this was due mainly to higher FFB production (+30% qoq), improved margin at the specialty oils and fats subsegment, as well as a lower net finance cost, which altogether more than offset lower CPO price realized and lower profitability at the refinery sub-segment

Risks

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

Forecasts

• FY06/16 core net profit forecasts lowered by 11.1-11.4%, largely to account for higher net finance cost assumption and lower EBIT margin assumptions at the manufacturing segment. No change in our average CPO price assumption for now, pending a further review in our average CPO price assumption. Ceteris paribus, every RM100/mt downward revision in our CPO price assumption will result in a 6.3% decline in our FY06/16 earnings forecast.

Rating

HOLD

Positives

• (1) Decent balance sheet; and (2) Strong cash flow generation ability.

Negatives

• (1) Weak near-term CPO price outlook; and (2) Pricey valuations.

Valuation

• Post earnings forecasts revision, SOP-derived TP is lowered by 2.7% to RM4.03 (see Figure 5). Ceteris paribus, every RM100/mt decline in our average CPO price forecast will result in a 2.7% (or 11 sen/share) decline in our SOPderived TP. Maintain HOLD recommendation for now.

Source: Hong Leong Investment Bank Research - 25 Aug 2015