Results

• 6MFY16 core net profit of RM414.1m (+4.0% yoy) was below ours and market expectation, accounting for 41.3% and 38.1% of our and consensus forecasts, respectively.

Deviations

• Weaker than expected FFB production, higher than expected interest expense and minority interest.

Dividend

• Declared an interim single tier dividend of 15sen/share.

Highlights

• 6MFY16 core net profit was up 4.4% yoy with better performance coming from manufacturing division while its property division continued to underperform. On the other hand, its 2QFY16 core net profit was down 11.1% qoq (+9.5% yoy) with weaker performance from plantation and manufacturing divisions.

• Excluding the unrealised forex loss of RM13.5m, plantation division 1HFY16 operating profit was only up marginally by 0.8% with better FFB production growth (+2.6% yoy) and better performance from processing operations offsetting the lower CPO prices.

• Downstream business’ operating profit was up significantly to RM219.6m from RM117.7m in 1HFY15 on the back of better sales and improvement in margin (excluding RM23.6m unrealized gain arising from fair value changes on outstanding derivatives contracts). Its margin for this segment improved to 6.1% from 4% in the corresponding period last year.

• KLK reported 7MFY16 FFB production of 2.1m tonnes, a decline of 1.7% yoy, likely due to severe drought in its estates in Sabah and Kalimantan in 2015. We now expect a marginal contraction in FFB production for FY16 as production is likely to remain weak in the coming months.

Risks

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

Forecasts

• We have revised our earnings forecast downward by 3-5% for FY16-FY17 to factor in the lower FFB production expectation, higher interest expenses and higher minority interest.

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.

Source: Hong Leong Investment Bank Research - 17 May 2016