1HFY21 core net profit of RM708m (+69%) came in within our expectation, accounting for 57% of our full-year estimate, as we anticipate weaker downstream performance in 2H and CPO price in 4QFY21. Declared interim DPS of 20 sen (vs. 15 sen declared SPLY), which will go ex on 9 Jul 2021. We tweak our FY21-23 core net profit forecasts marginally higher (by 1.2-1.4%), as we recalibrated our earnings model (following the release of FY20 annual report. Maintain BUY rating, with a slightly lower sum-of-parts TP of RM26.60 (from RM26.64 earlier), as we updated our valuation parameters.

Within our expectation. 2QFY21 core net profit of RM367.4m (QoQ: +9.0%; YoY: +43.3%) took 1HFY21 sum to RM708.0m (+69.0%), accounting for 57% of our full-year estimate (consensus: 63.9%). We consider the results within our expectation, as we anticipate weaker downstream performance in 2H and CPO price in 4QFY21.

Exceptional items in 1HFY21. Core net profit of RM708.0m in 1HFY21 was arrived after adjusting for (i) RM41.7m fair value loss on outstanding derivative contracts at plantation segment, (ii) RM10.3m unrealised loss on fair value change on outstanding derivative contracts at manufacturing segment, (iii) RM12.2m surplus of fair value on ordinary investment, (iv) RM50.6m forex gain, and (v) RM20.8m deferred tax (which arose mainly from revaluation of bearer plants in FY16).

Dividend. Declared interim DPS of 20 sen (vs. 15 sen declared SPLY), which will go ex on 9 Jul 2021.

QoQ. 2QFY21 core net profit increased by 9.0% to RM367.4m, helped mainly by better showing at manufacturing segment (arising from higher earnings from Europe and Malaysia operations), which more than mitigated lower contribution from plantation (arising from seasonally lower FFB production, higher CPO production cost, and lower contribution from processing and trading operations) and property segments, as well as losses incurred by farming sector.

YoY. 2QFY21 core net profit surged 43.3% to RM367.4m (from RM256.3m SPLY), boosted by better performance at all segments. During the quarter, higher palm product prices and improved contributions from processing and trading operations boosted operating profit at plantation segment by 71.6% (at RM276.3m), whilst higher sales volume boosted manufacturing segment’s operating profit by 91.3% (at RM207.2m).

YTD. 1HFY21 core net profit surged 69.0% to RM708m, boosted mainly by higher realised palm product prices, significantly better contribution from manufacturing and property segments.

Outlook. Despite having anticipated challenging operating environment at the olechemical sub-segment (due to duty differential for oleochemical products in Indonesia), management expects KLK’s earnings performance to improve significantly in FY21, as challenging operating environment for oleochemical sub-segment will be mitigated by buoyant palm product prices (arising from tight palm oil inventories and global edible oil supplies).

Forecast. We tweak our FY21-23 core net profit forecasts marginally higher (by 1.2- 1.4%), as we recalibrated our earnings model (following the release of FY20 annual report.

Maintain BUY, with lower SOP-derived TP of RM26.60. We maintain our BUY rating on KLK, with a slightly lower SOP-derived TP of MR26.60 (from RM26.64 earlier), as we updated our valuation parameters.

Source: Hong Leong Investment Bank Research - 20 May 2021