1QFY21 core net profit of RM337.2m (QoQ: +125.9%; YoY: +92.8%) beat expectations, accounting for 33.2-34.9% of consensus and our full-year estimates, due mainly to better-than-expected earnings at manufacturing segment. Despite having anticipated a challenging operating environment for oleochemical operations (on the back of high feedstock costs in coming quarters), KLK expects FY21 performance to improve from FY20, due mainly to buoyant CPO and PK prices. We raise our FY21-22 core net profit forecasts by 10-10.4% to RM1.06-1.08bn, largely to account for higher margin assumptions at manufacturing segments. Post earnings adjustments, we maintain our BUY rating on KLK, with higher sum-of-parts TP of RM28.66 (from RM27.28 earlier).

Better-than-expected. 1QFY21 core net profit of RM337.2m (QoQ: +125.9%; YoY: +92.8%) accounted for 33.2-34.9% of consensus and our full-year estimates. The results beat expectations, mainly on the back of better-than-expected earnings recorded at manufacturing segment.

Exceptional items. Core net profit of RM337.2m was arrived after adjusting for (i) RM39m fair value loss on outstanding derivative contracts and RM3.3m fair value gain on valuation of unharvested FFB at plantation segment, (ii) RM14.5m unrealised gain on fair value change on outstanding derivative contracts at manufacturing segment, (iii) RM0.3m disposal gain, and (iv) RM41.1m forex gain.

QoQ. 1QFY21 core net profit more than doubled to RM337.2m (from RM149.3m in previous quarter), as lower CPO sales volume (-9.6%), higher CPO production cost (as a result of lower FFB output) and lower property earnings were more than mitigated by stronger average palm product prices (CPO: +13.1%; PK: +22.8%), improved performance at manufacturing segment (arising mainly from stronger performance at China operations) and higher contribution from farming segment (as 1Q is seasonally stronger).

YoY. 1QFY21 core net profit surged 92.8% to RM337.2m, boosted by higher average palm product prices (CPO: +22.5%, PK: +37.6%), better performance at manufacturing segment (largely contributed by China and Europe operations), higher contribution from property segment, and sharply higher contribution from farming segment (as a result of improved yields and higher cropped area).

Outlook: Better performance in FY21. Despite having anticipated a challenging operating environment for oleochemical operations (on the back of high feedstock costs in coming quarters), KLK expects FY21 performance to improve from FY20, due mainly to buoyant CPO and PK prices.

Forecast. We raise our FY21-22 core net profit forecasts by 10-10.4% to RM1.06- 1.08bn, largely to account for higher margin assumptions at manufacturing segments. Our core net profit forecasts are arrived based on average CPO price assumption of RM2,700/mt for FY21-22. Based on our estimates, every RM100/mt change in our CPO price assumptions will result in our core net profit forecasts changing by ~6-7% p.a..

Maintain BUY, with higher SOP-derived TP of RM28.66. We maintain our BUY rating on KLK with a higher sum-of-parts TP of RM28.66 (from RM27.28 earlier), following the upward adjustment to our core net profit forecasts. At RM22.76, KLK is trading at FY21- 22 P/E of 22.9x and 22.6x, respectively.

Source: Hong Leong Investment Bank Research - 18 Feb 2021