1HFY20 core net profit of RM419m (+47.3%) accounted for 50.8-56.2% consensus and our full-year estimates. We consider the results within expectation, as we expect weaker performance in 2HFY20 (on the back of lower palm product prices. Declared interim of 15 sen (ex-date: 10 Jul 2020). For the full-year, we are projecting a total DPS of 50 sen (translating to a dividend yield of 2.3%). We maintain our core net profit forecasts, sum-of-parts derived TP of RM22.82. However, we downgrade our rating to HOLD (from Buy earlier), as valuation has become stretched following recent share price performance.

Within our expectation. 2QFY20 core net profit of RM256.3m (QoQ: +57.1%; YoY: +83.2%) took 1HFY20 core net profit to RM419m (+47.3%), accounting for 50.8- 56.2% consensus and our full-year estimates. We consider the results within expectation, as we expect weaker performance in 2HFY20 (on the back of lower palm product prices).

Exceptional items in 2QFY20. During the quarter, we adjusted RM228.4m worth of EIs from KLK’s reported net profit. These include (i) RM178.1m unrealised forex losses, (ii) RM8.2m fair value loss (on unharvested FFB) and RM11.2m unrealised profit from changes in fair value on outstanding derivative contracts at plantation segment, (iii) RM17.4m unrealised loss from fair value changes on outstanding derivative contracts at manufacturing segment, (iv) RM36.4m reversal of deferred tax (arising from a reduction in Indonesia’s corporate tax rate).

Dividend. Declared interim DPS of 15 sen (ex-date: 10 Jul 2020). For the full-year, we are projecting a total DPS of 50 sen (translating to a dividend yield of 2.3%).

QoQ. Core net profit rose 57.1% to RM256.3m in 2QFY20, as lower FFB output (- 8.9%) and weaker property earnings were more than mitigated by higher palm product prices (CPO: +16.5%; PK: +23.3%) and contribution from Synthomer (an associate listed in the UK).

YoY. Core net profit soared 83.2% to RM256.3m in 2QFY20, as lower FFB output (- 9.8%) and weaker property earnings were more than mitigated by higher palm product prices (CPO: +30.6%; PK: +18.1%) and higher earnings at manufacturing division (thanks to improved margins at Malaysia and China oleochemical operations).

YTD. 1HFY20 core net profit rose 47.3% to RM419m, as lower FFB output ( -10.7%) was more than mitigated by higher palm product prices (CPO: +24.5%; PK: +3.8%) and better margins at Malaysia and China oleochemical operations).

Forecast. Maintain.

Downgrade to HOLD with unchanged SOP-derived TP of RM22.82. Maintain SIO derived TP of RM22.82 (see Figure #2). However, we downgrade our rating to HOLD (from Buy earlier), as valuation has become stretched following recent share price performance.

Source: Hong Leong Investment Bank Research - 28 May 2020