1QFY20 core net profit of RM167.2m (QoQ: +16.6%, YoY: -3.2%) accounted for 18.3-18.6% of consensus and our full-year estimates. We consider the results within our expectation as we expect stronger performance in subsequent quarters, on the back of higher palm oil product prices. Maintain core net profit forecasts, SOP-derived TP of RM26.48, and HOLD rating on the stock.

Within expectations. 1QFY20 core net profit of RM167.2m (QoQ: +16.6%, YoY: - 3.2%) accounted for 18.3-18.6% of consensus and our full-year estimates. We consider the results within our expectation as we expect stronger performance in subsequent quarters, on the back of higher palm oil product prices.

Exceptional items (EIs) in 1QFY20. During the quarter, we adjusted for RM4m worth of EIs from KLK’s reported net profit. These include (i) RM27.2m unrealised loss arising from FV changes on outstanding derivative contracts and RM11.7m FV gain on valuation of unharvested FFB at plantation segment, (ii) RM4.4m unrealised loss arising from FV changes on outstanding derivative contracts at manufacturing segment, and (iii) RM23.9m forex gain arising from translation of inter-company loans denominated in foreign currencies.

QoQ. 1QFY20 core net profit grew 16.6% to RM163.2m, as lower contributions from manufacturing and property segments, coupled with a 7.1% decline in FFB output were more than mitigated by higher CPO prices and seasonal profit at farming sector.

YoY. 1QFY20 core net profit shrank 3.2% to RM163.2m, as higher CPO prices and improved core performance at manufacturing segment were more than negated by an 11.5% decline in FFB production, lower property earnings and associate contributions.

FFB output. FFB output declined by 11.5% YoY to 978k tonnes in 1QFY20, and this came way below management guidance (3-5% p.a. over the long term). We maintain our FFB production projection of -0.4% in FY20 for now, pending further update with management.

Forecast. We maintain our FY20-21 core net profit forecasts for now, pending further update with management.

Maintain HOLD, with unchanged SOP-derived TP of RM26.48. We maintain our HOLD rating on KLK; with an unchanged SOP-derived TP of RM26.48 (see Figure #1).

Source: Hong Leong Investment Bank Research - 18 Feb 2020