Results

• 1QFY17 core net profit of RM327.4m (qoq: +48.2%; yoy: +17.2%) came in above expectations, accounting for 27.9- 31.2% consensus and our full-year forecasts.

Deviations

• Better-than-expected palm production and property earnings.

Dividend

• None.

Highlights

• QoQ… 1QFY17 core net profit increased by 55.6% to RM341.1m, due to: (1) Higher plantation earnings arising from higher palm product prices, better sales volume of CPO and PK, higher FFB production and positive contribution from processing operations; (2) A sharp increase in earnings contribution from farming business (involved in wheat and cattle businesses) arising from favourable weather condition. All these more than offset weaker performance at the manufacturing division, which in turn was due to margin compression arising from higher raw material prices (in particularly, CPKO) and weak demand.

• YoY… 1QFY17 core net profit increased by 83.3% to RM341.1m, boosted mainly by higher plantation earnings (which in turn was driven by higher palm product prices), better performance at property and farming divisions. All these more than mitigated weaker performance at the manufacturing division, which was affected by rising raw material costs (in particularly CPKO).

Risks

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

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

Forecasts

• FY17-19 core net profit forecasts raised by 14.4%, 4.9% and 6.2% respectively, as we raised our FFB yield and property earnings assumptions.

Rating

HOLD ( ↔ )

• While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations and weak property sentiment (which will in turn drag its overall performance).

Valuation

• SOP-derived TP raised by 4.2% to RM25.55 (see Figure 4) as we raised our core net profit forecasts and updated our valuation parameters. Maintain HOLD recommendation on KLK.

Source: Hong Leong Investment Bank Research - 15 Feb 2017