Results

• In line. 3QFY16 core net profit of RM305.1m (qoq: +56.6%; yoy: +12.3%) took 9MFY16 core net profit to RM719.2m (+13.8%), accounting for 67.6-71.7% of consensus and our full-year net profit forecast. We consider the results within our expectation, as we expect the strong set of results in 3Q to be sustained into 4Q on the back of high palm product prices.

Deviations

• -

Dividend

• -

Highlights

• Qoq, 3QFY16 core net profit increased by 56.6% to RM305.1m mainly on higher palm product prices (average realized selling prices of CPO and PK rose by 13.2% and 20.7%) and higher sales volume at the oleochemical segment, which altogether more than offset weak performance at the fatty alcohol business (as buyers of fatty alcohol switched to lower cost synthetic-based alternatives as a result of higher CPKO prices).

• 9MFY16 core net profit increased by 13.8% to RM719.2m mainly on the back of improved sales volume from the Europe operations and much improved contribution from oleochemical operations. Despite higher palm product prices, performance at the plantation segment was flattish mainly on the back of higher CPO production cost and lower FFB production. YTD, we note that KLK’s FFM and PK output declined by 6% and 16% respectively, and we believe the weaker palm output was due to the lagged impact of severe drought in late 2015.

Risks

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

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

Forecasts

• Maintained

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 unchanged SOP-derived target price of RM22.10.

Source: Hong Leong Investment Bank Research - 18 Aug 2016