KLK’s 9MFY18 core net profit of RM691.9mm (-9.8%) came in below expectations, accounting for only 62.8-63.3% of consensus and our full-year forecasts. Weaker-than-expected realised palm product prices and property development earnings were the key culprits to the weaker-than-expected set of performance. We lower FY18-20 core net profit forecasts by 3.8-8.8%, largely to account for lower 3.8-2.9% and 0.5% respectively, largely to account for lower realised palm product prices, higher CPO production cost assumption and lower property earnings assumption. Correspondingly, SOP-derived TP is cut by 2.5% to RM23.36. Maintain HOLD rating.

Below expectations. 9MFY18 core net profit of RM691.9m (-9.8%) came in below expectations, accounting for only 62.8-63.3% of consensus and our full-year forecasts. The weaker-than-expected set of performance came largely from lower than-expected realised palm product prices and property development earnings.

QoQ. 3QFY18 core net profit increased marginally (by 1%) to RM194.7m, mainly on lower FFB production and palm product prices (which have collectively resulted in adjusted operating profit at the plantation division declining by 37% to RM138.8m), which more than mitigated by improved performance at manufacturing and property development divisions.

YoY. 3QFY18 core net profit increased by 22.1% to RM194.7m, as weaker plantation earnings (arising mainly from lower palm product prices) was more than mitigated by (i) improved manufacturing earnings (arising from the absence of lumpy inventory write-down, and lower raw material costs, which had in turn resulted in better profitability), (ii) improved property earnings.

YTD. 9MFY18 core net profit declined by 9.8% to RM691.9m as improved manufacturing performance (which adjusted operating profit surged 2.8x to RM380m on lower raw material prices and absence of lumpy inventory writedown) was more than offset by lower plantation earnings (arising mainly from lower palm product prices and negative contribution from processing and trading operations) and lower property earnings.

Forecast. We lowered our FY18-20 core net profit forecasts by 8.8%, 3.8% and 3.9%, respectively, largely to account for (i) lower realised palm product prices in 9MFY18, (ii) higher CPO production cost assumption, and (iii) lower property earnings assumptions.

Maintain HOLD, TP: RM23.36. Post downward revision in our core net profit forecasts, we lowered our SOP-derived TP on KLK by 2.5% to RM23.36. 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 near-term headwinds within the upstream plantation segment.

Source: Hong Leong Investment Bank Research - 15 Aug 2018