FY18 core net profit of RM822.6m (-22.2%) disappointed (accounting for only 82.5-85.4% of our and consensus forecasts) mainly on weaker-than-expected palm product prices. Management guided that current weak performance will likely protract into 1HFY19 as weak near-term palm product prices will more than offset decent performance at its oleochemical division. We maintain our FY19-20 core net profit forecasts for now, pending a review on our average CPO price assumptions (by Dec-2018). Maintain HOLD with unchanged SOP-derived TP of RM23.36.

Below expectations. 4QFY18 core net profit of RM127.1m (QoQ: -34.7%; YoY: - 52.3%) took FY18 core net profit to RM822.6m (-22.2%). The results disappointed, accounting for only 82.5-85.4% of ours and consensus forecasts. Weaker-than expected earnings at the plantation division (arising from weaker-than-expected realised palm product prices) were the key culprit to the weak results.

Dividend. No final DPS announced yet, and final DPS will only be recommended at later date. YTD, KLK paid total DPS of 15 sen.

QoQ. 4QFY19 core net profit declined by 34.7% to RM127.1m due to (i) a slight decline in plantation earnings (as lower realised palm product prices were mostly mitigated by a 10.2% increase in FFB production and lower CPO production cost) and (ii) a sharp decline in manufacturing earnings (arising from weaker sales volume and margin at European operations, and RM21.6m impairment on an under-performing specialised oleochemical plant). Weaker performance at the two main divisions was partly mitigated by improved property earnings.

YoY. 4QFY19 core net profit declined by 52.3% due to (i) lower plantation earnings (arising from weaker palm product prices and losses at processing and trading operations), and (ii) weaker manufacturing earnings (arising from weaker sales volume and margin at European operations, and RM21.6m impairment on an under performing specialised oleochemical plant).

YTD. FY18 core net profit declined by 22.2% to RM822.6m as stronger earnings at manufacturing division was more than offset by sharply weaker plantation earnings (arising from weaker palm product prices and losses at processing and trading operations). We note that operating earnings (adjusted for fair value loss) at manufacturing division more than doubled to RM447m (from RM193m in FY17), mainly on the back of stronger sales volume, favourable raw material prices and the absence of lumpy inventory write-down. However, the stronger performance at the manufacturing division was more than offset by weaker plantation earnings.

Weak performance to protract into 1HFY19. Management guided that current weak performance will likely protract into 1HFY19 as weak near-term palm product prices (arising from current high CPO stockpile) will more than offset decent performance at its oleochemical division.

Forecast. We maintain our FY19-20 core net profit forecasts for now with downward bias, pending a review on our average CPO price assumptions (by Dec-2018).

Maintain HOLD, TP: RM23.36. Maintain HOLD with unchanged SOP-derived TP of 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 Nov 2018