KLK’s 1HFY18 core net profit of RM503m (-16.2%) came in below expectations, accounting for only 43-44% of consensus and our full-year forecasts. We lower our FY18-19 core net profit forecasts by 2.9% and 0.5% respectively, largely to account for slightly higher CPO production cost assumptions. Despite the slight downward adjustment in our core net profit forecasts, we raised our SOP derived TP on KLK by 0.5% to RM24.32 as we take this opportunity to roll forward our valuation base year (from FY18 to FY19).

Below expectations. 1HFY18 core net profit of RM503.4m (-16.2%) came in below expectations, accounting for only 43-44% of consensus and our full-year forecasts. The weaker-than-expected performance came largely from higher-than-expected CPO production cost.

QoQ. 2QFY18 core net profit declined by 37.9% to RM192.8m, dragged mainly by: (i) negative contribution from processing and trading sub-segment, lower palm production and prices, which have in turn resulted in weaker performance at plantation division; and (ii) weaker performance at oleochemical sub-segment.

YoY. 2QFY18 core net profit declined by 25.8% to RM192.8m, dragged mainly by weaker plantation earnings. Despite the 5.4% increase in FFB production and lower CPO production cost, plantation division’s operating profit (adjusted for net unrealised forex translation loss) declined by 40% to RM220m mainly on the back of lower palm product prices (which were 20-33% lower vs 2QFY17).

YTD. 1HFY18 core net profit declined by 16.2% to RM503.4m, dragged mainly by weaker CPO sales volume and palm product prices, but partly mitigated by higher FFB production and better manufacturing earnings. Core operating profit at manufacturing division (adjusted for unrealised gain arising from changes in fair value on outstanding derivative contracts) jumped 3x to RM408m and this was due mainly to higher sales volume and margin expansion (arising from lower raw material cost).

Forecast. We lower our FY18-19 core net profit forecasts by 2.9% and 0.5% respectively, largely to account for slightly higher CPO production cost assumptions.

Maintain HOLD, TP: RM24.32. Despite the slight downward adjustment in our core net profit forecasts, we raised our SOP-derived TP on KLK by 0.5% to RM24.32 as we take this opportunity to roll forward our valuation base year (from FY18 to FY19). 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. At current share price of RM25.40, KLK is trading at FY18-19 P/E of 26.8x and 26.1x, respectively. Maintain Hold recommendation.

Source: Hong Leong Investment Bank Research - 17 May 2018