Results

Deviations

• -

Dividend

• -

Highlights

• 1QFY16 net profit was up 73.6% yoy (+90.3% qoq) on the back of strong performance from its plantation and manufacturing divisions.

• Excluding the unrealized loss of RM2.1m from fair value changes on outstanding derivatives contracts, plantation division reported operating profit of RM267.9m (+68.2% qoq, +24.7% yoy) in 1QFY16 supported by higher crop productions, higher palm kernel ASP and improved contribution from refineries and kernel crushing plants.

• Downstream business’ operating profit was up by 3% qoq (+>100% yoy) to RM124.5m, excluding the unrealized gain of RM9.9m from fair value changes on outstanding derivatives contracts. In 1QFY16, manufacturing division reported better operating profit margin of 7.0% as compared to 4.3% in 1QFY15 (7.0% in 4QFY15). 

• KLK reported strong FFB production growth of 8.7% yoy to 1.3m tonnes for 4MFY16 partly due to the low base in 1QFY15 as productions were affected by the monsoon flood in Peninsular Malaysia. Nevertheless, we maintain our FFB production forecast of 3-5% yoy for full year FY16 as FFB production in the coming quarters are likely to be affected by last year’s severe drought in its estates in Sabah and Kalimantan.

• Its manufacturing division has been performing in the recent quarters. With the new capacities coming on stream, we believe that the division will perform better in the coming quarters.

Risks

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

• Weaker-than-expected recovery in edible oil demand and

Forecasts

• No change to our earnings forecasts.

Rating

HOLD

Negatives

• Weak global economic outlook, coupled with the impending excess supply of CPO will affect both demand and prices of CPO. 

Positives

• Rising FFB contribution from estates in Indonesia and healthy balance sheet.

Valuation

Maintained HOLD with target price of RM22.10 based on SOP valuation.