Results

• 3QFY17 core net profit of RM159.4m (qoq: -38.6%; yoy: -47.7%) took 9MFY17 core net profit to RM781.7m (+8.7%). The results came in below expectations, accounting for only 61.1-64.3% of our and consensus full- year forecasts.

Deviations

• Weaker-than-expected performance at manufacturing division, arising from RM60.3m inventory writedown and weak demand in anticipation of weaker CPKO prices.

Dividend

• None for the quarter, as dividends were usually announced during 2Q and 4Q of the financial year.

Highlights

• QoQ… 3QFY17 core net profit declined by 38.6% to RM159.4m, dragged mainly by weaker performance at the plantation division (arising from lower palm product prices) and manufacturing division (arising from RM60.3m inventory writedown and weak demand in anticipation of further decline in oleo product prices).
• YoY… Although revenue increased by 24.2% to RM4.9bn (due to higher palm product prices, FFB production and oleo product prices), 3QFY17 core net profit declined by 47.7% to RM159.4m, as higher plantation earnings were more than offset by losses at the manufacturing division. The losses incurred at the manufacturing division were due mainly to RM60.3m inventory writedown to reflect: (1) The mismatch between prices of oleo products against KLK’s raw material purchase price; and (2) Weak demand in anticipation of a further decline in oleo product prices.
• YTD… 9MFY17 core net profit increased by 8.7% to RM781.7m, as weaker manufacturing earnings (arising from high raw material costs in 1HFY17 and inventory writedown in 3QFY17) were more than mitigated by a 10.6% increase in FFB production and higher palm product prices (which have in turn contributed to higher plantation earnings) as well as higher property earnings.

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 are lowered by 16.4%, 6.6% and 6.5% respectively, largely to account for lower earnings assumptions at the manufacturing divisions.

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 is cut by 5.4% to RM24.18 to account for: (1) Lower core net profit forecasts; and (2) Latest share price of listed associate (Synthomer Plc).

Source: Hong Leong Investment Bank Research - 16 Aug 2017