FY19 core net profit of RM614m (-25.4%) missed expectations, due mainly to lower-than-expected palm product prices. Despite the weak finish to FY19 results, we raised FY20-21 core net profit forecasts marginally higher (by 1.4- 5.3%), given our more bullish view on palm product prices, which more than offset our lower margin assumptions at the manufacturing segment. Correspondingly, we upgrade our rating on KLK to BUY (from Hold previously) with a higher SOP-derived TP of RM24.37.

Below expectations. 4QFY19 core net profit of RM140m (QoQ: -22.1%; YoY: -2.1%) took FY19 core net profit to RM614m (-25.4%). The results missed expectations, accounting for only 87.2-93.2% of our and consensus estimates. Lower-than-expected palm product prices were the key variance against our estimate.

Exceptional items (EIs) in 4QFY19. During the quarter, we adjusted RM35m worth of EIs from KLK’s reported net profit. These include (i) RM43.1m disposal gain (of which RM42.5m came from surplus from government acquisition of plantation land), and (ii) RM8.1m forex loss arising from translation of inter-company loans.

QoQ. 4QFY19 core net profit declined by 22.1% to RM140m, as higher plantation earnings (arising from higher sales volume and lower CPO production cost) were more than negated by lower manufacturing earnings, higher finance and tax expenses.

YoY. 4QFY19 core net profit declined marginally (by 2.1%) to RM140m, as lower plantation (arising mainly from lower palm product prices and higher CPO production cost) and property earnings were mostly offset by higher manufacturing earnings (arising from lower PK prices).

YTD. FY19 core net profit declined by 25.4% to RM614m, dragged mainly by significantly lower plantation earnings (arising from significantly lower palm product prices and higher CPO production cost). Manufacturing segment registered flattish operating earnings growth in FY19, as weaker contribution from Europe operations (due to margin erosion) were mitigated by improved margin and sales volume in Malaysia and China operations.

Forecast. Despite the weak finish to FY19 results, We raise our FY20-21 core net profit forecasts marginally higher (by 1.4-5.3%), given our more bullish view on palm product prices (please refer to our sector report for more details), which more than offset our lower margin assumptions at the manufacturing segment.

Upgrade to BUY, with higher SOP of RM24.37. We raise our SOP-derived TP on KLK by 6.7% to RM24.37, to account for higher earnings forecasts and higher PE multiple 30x vs. 28x previously) assigned for its upstream plantation business (amidst CPO price upcycle). Correspondingly, we upgrade our rating on KLK to BUY (from Hold previously).

Source: Hong Leong Investment Bank Research - 20 Nov 2019