KLK’s 1HFY17 core net profit of RM671m (+58.1% yoy) was within our expectations. We maintain our FY17 core EPS forecasts but cut our FY18-19 core EPS forecasts by 9-12% as a conservative measure. Our CPO ASP assumption of RM2,600/MT is maintained. We maintain our BUY rating on KLK with a higher target price of RM29.00.

2QFY17 Core Net Profit Declines 38% Qoq

Sequentially, KLK’s 2QFY17 revenue declined slightly by 0.5% qoq to RM5.47bn, due to a drop in contribution from the plantation and property divisions but partially mitigated by a higher contribution from manufacturing division. The 2QFY17 core net profit, after excluding for one-off items, declined by 38.1% qoq to RM276.8m.

1HFY17 Core Net Profit Improves by 58% Yoy, Within Our Expectations

KLK reported an increase in 1HFY17 revenue by 36.4% yoy to RM10.97bn, partly attributable to higher CPO and PK ASP coupled with higher contributions from the manufacturing and property divisions. The CPO and PK ASPs were higher at RM2,851/MT (1HFY16: RM2,075/MT) and RM2,871/MT (1HFY16: RM1,578/MT), respectively. PBT in 1HFY17 declined by 24.8% yoy to RM868m (1HFY16 PBT: RM1.15bn), as it included an RM485.6m surplus arising from the sale of plantation land to an associate (excluding the sale of plantation land, the PBT in 1HFY17 increased by 29.9% yoy). After excluding one-off items including the surplus on the disposal of land, forex losses and gains on derivatives, the 1HFY17 core net profit amounted to RM670.9m, higher by 58.1% yoy. The 1HFY17 core net profit was within our expectations but above consensus, accounting for 50.1% of our forecast and 57.4% of the street’s figure. An interim DPS of 15 sen was announced (1HFY16: 15 sen).

Maintain BUY Rating With a Higher TP of RM29.00

We leave our FY17E core EPS unchanged post the 1HFY17 results but cut our FY18-19E core EPS by 9-12% to account for lower FFB yield and OER rate assumptions of 22 MT/ha (from 23-23.5 MT/ha) and 21% (from 22%), respectively, as a conservative measure due to the prolonged effect of El Nino. We maintain our CPO ASP assumption of RM2,600/MT. We raise our 12M TP for KLK to RM29.00 from RM28.72 as we roll forward our valuation basis to FY18, still based on a 22x 2017E PER. Maintain BUY as we still expect higher FFB and CPO production as well as lower cost of production to drive profit growth in FY17-19.

Source: Affin Hwang Research - 23 May 2017