1HFY19 core net profit of RM293.2m (-49.1%) came in below expectations, accounting for only 31.1-31.9% of our and consensus full-year forecasts, mainly on the back of lower-than-expected realised average CPO price. Declared 1st interim DPS of 15 sen. We lower our FY19 core net profit forecast by 15.6% to RM795m (mainly to account for lower palm oil prices in 1HFY19), but maintain our FY20-21 core net profit forecasts of RM1.05bn and RM1.06bn respectively for now, pending a further review in our projected average CPO price assumptions post reporting season. Maintain HOLD rating, but with higher SOP-derived TP of RM24.79 (from RM22.83 previously) as we roll forward our valuation base year from FY19 to FY20.

1H19 disappointed. 2QFY19 core net profit of RM139.9m (QoQ: -17.0%; YoY: - 39.2%) took 1HFY19 core net profit to RM293.2m (-49.1%). The results came in below expectations, accounting for only 31.1-31.9% of our and consensus full-year forecasts, mainly on the back of lower-than-expected realised average CPO price (RM1,906/mt vs. RM2,300/mt of what we projected).

Dividend. Declared 1st interim DPS of 15 sen (ex-date: 11 Jul 2019, payment date: 6 Aug 2019). For the full-year, we are projecting a total DPS of 44 sen, translating to a projected dividend yield of 1.8%.

QoQ. 2QFY19 core net profit declined by -17% to RM139.9m, as better manufacturing performance (arising from higher sales volume and improved margins at Europe operations) was more than offset by weaker plantation (arising from weaker FFB production and realised average PK price but partly mitigated a 7% increase in realised average CPO price) and property earnings.

YoY. 2QFY19 core net profit declined by 39.2% to RM139.9m, dragged mainly by significantly lower palm product prices (CPO: -17.9%; PK: -37.3%), but partly mitigated by marginally higher manufacturing earnings and FFB production (+3.1%).

YTD. 1HFY19 core net profit fell 49.1% to RM293.2m, dragged mainly by significantly lower plantation earnings (arising from lower palm product prices, but partly mitigated by a 5.6% increase in FFB production) and weaker manufacturing earnings (arising from lower sales volumes and contributions from Europe operations).

Forecast. We lower our FY19 core net profit forecast by 15.6% to RM795m (mainly to account for lower palm oil prices in 1HFY19), but maintain our FY20-21 core net profit forecasts of RM1.05bn and RM1.06bn respectively for now, pending a further review in our projected average CPO price assumptions post reporting season. Our sensitivity analysis indicates that every RM100/mt change in our average CPO price assumptions will change our FY19-21 core net profit forecasts by 8-9%.

Maintain HOLD, TP: RM24.79. Despite the results shortfall, we maintain our HOLD rating, with higher SOP-derived TP of RM24.79 (from RM22.83 previously) as we roll forward our valuation base year from FY19 to FY20. In our sum-of-parts valuation, we value KLK’s plantation business at 24x FY20 earnings, manufacturing business at 15x FY20 earnings, and property business based on RNAV methodology. 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 - 23 May 2019