9MFY19 core net profit of RM473.1m (-32.0%) accounted for 67.2-63.8% of our and consensus full-year forecasts. We deem the results within our expectation, as we expect 4Q to come in stronger, underpinned by recent recovery in palm product prices and seasonally stronger FFB output. During the quarter, KLK incurred RM145.3m impairment on its Liberia investment (which we believe was largely related to Butaw estate), as the group determined that it is no longer feasible to continue operations in that estate following recent High Carbon Stock and Higher Conservation Value assessments. Post impairment, we estimate that it still has remaining unimpaired book value of circa RM250m in Liberia. We maintain our FY19-21 core net profit forecasts, sum-of-parts TP of RM22.84, as well as HOLD rating on KLK.

Within our expectation. 3QFY19 core net profit of RM179.9m (QoQ: +28.6%; YoY: - 50.5%) took 9MFY19 core net profit to RM473.1m (-32.0%), accounting for 67.2- 63.8% of our and consensus full-year forecasts. We deem the results within our expectation, as we expect 4Q to come in stronger, underpinned by recent recovery in palm product prices and seasonally stronger FFB output.

Exceptional items (EIs) in 3QFY19 – mainly related to impairment in Liberia.

During the quarter, we adjusted RM131.2m worth of EIs from KLK’s reported net profit and these include mainly (i) RM15.5m unrealised loss from fair value changes on outstanding derivative contracts at manufacturing segment, (ii) RM28.2m forex gain from translation of inter-company loans, and (iii) RM145.3m impairment on an estate in Liberia.

Impairment on Liberia estate. We believe the RM145.3m impairment incurred was largely related to Butaw estate, which operation was ceased, as the group determined that it is no longer feasible to continue operations in that estate following recent High Carbon Stock and Higher Conservation Value assessments. Based on our estimate, KLK still has a remaining unimpaired book value of circa RM250m in Liberia assets.

QoQ. 3QFY19 core net profit increased by 28.6% to RM179.9m, as lower core plantation earnings (arising from lower palm product prices, FFB production and higher CPO production cost) were more than mitigated by improved manufacturing and property earnings, dividend income from associates, and lower tax expense.

YoY. 3QFY19 core net profit declined by 50.5% to RM179.9m, mainly on the back lower earnings contribution from plantation (arising from lower palm product prices) and manufacturing (arising from weaker European operations, but partly offset by improved earnings oleochemical sub-segment).

YTD. 9MFY19 core net profit declined by 32.0% to RM473.1m, as improved property earnings lower tax expense were more than offset by sharply lower palm product prices (CPO: -20.7%; PK: -39.7%), weaker manufacturing earnings (arising mainly from weaker margins at Europe operations and weaker contribution from oleochemical sub-segment).

Forecast. Maintain, as we expect 4Q performance to come in stronger.

Maintain HOLD; TP: RM22.84. Maintain our HOLD rating, with unchanged sum-ofparts (SOP) TP of RM22.84. In our SOP valuation, we value KLK’s plantation business at 28x FY20 earnings, manufacturing business at 15x FY20 earnings, and property business based on RNAV methodology.

Source: Hong Leong Investment Bank Research - 27 Aug 2019