1QFY19 core net profit of RM168.6m (QoQ: +17.9%; YoY: -51.2%) accounted for only 17.3-17.9% of consensus and our full-year forecasts), we consider the results within expectations, as we expect subsequent quarters to come in stronger on the back of recent palm product price recovery. We maintain our core net profit forecasts, SOP-derived TP of RM22.83, as well as HOLD rating in the stock.

Deemed within expectations. 1QFY19 core net profit of RM168.6m (QoQ: +17.9%; YoY: -51.2%) accounted for only 17.3-17.9% of consensus and our full-year forecasts. We deem the results within expectations, as we expect subsequent quarters to come in stronger on the back of recent palm product price recovery.

QoQ. 1QFY19 core net profit improved by 17.9% to RM168.6m, as lower palm product prices and property earnings were more than mitigated by a 8.5% increase in FFB output (partly due to seasonal effect) and positive contributions from processing and trading operations at the plantation segment, a sharp increase in manufacturing earnings (aided mainly by margin expansion at Malaysia operations), and seasonally strong farming income (profit of RM56.5m vs. a loss of RM7.7m in previous quarter).

YoY. 1QFY19 core net profit declined by 51.2% to RM168.6m, dragged mainly by (i) sharply lower plantation earnings (as the 7.9% improvement in FFB output was more than offset by sharply lower palm product prices), and (ii) weaker manufacturing earnings (arising from weaker performance at China and Europe operations, but partly mitigated by better performance at Malaysia operations).

Worst is over… Management hinted that the worst is behind KLK, as CPO prices have recovered from the low levels in previous quarter (we note that CPO spot price in Malaysia has recovered by 7.5% to RM2,107/mt YTD). Besides, performance for oleochemicals will likely sustain its decent performance, underpinned by higher margins and capacity utilisation.

Forecast. Maintained. In our forecasts, we are projecting average CPO price forecasts of RM2,300-2,400/mt in FY19 and FY20, respectively. Based on our estimates, every RM100/mt change in our average CPO price assumption will change our FY19 core net profit forecast by 7.3%.

Maintain HOLD, TP: RM22.83. Maintain HOLD with unchanged SOP-derived TP of RM22.83. While we like KLK for its oil palm plantation estates’ age profile (average age of 12.1 years as at end-FY18) and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations.

Source: Hong Leong Investment Bank Research - 19 Feb 2019