KL Kepong’s 1HFY18 core net profit of RM470m accounted for 40% of both our previous FY18 forecast as well as consensus. The plantations (due to lower sales volume and ASP of CPO) and property (due to lower development profits recognised) divisions’ profits were lower yoy, while the manufacturing segment’s profit increased (due to better margins). We are cutting our FY18-20E core EPS forecasts by 2-10% to account for the weak results and lowering our TP on KLK to RM24.50. We maintain our HOLD rating on the stock.

1HFY18 Results Below Expectations

KLK reported lower 1HFY18 revenue by 9.9% yoy to RM9.9bn, due to the lower contributions from the plantations, property and investment holding divisions, but this was partially offset by a higher contribution from the manufacturing division. For 1HFY18, KLK’s FFB production was up by 1.5% yoy to 1.98m MT, while CPO and PK ASPs were lower at RM2,487/MT (1HFY17: RM2,851/MT) and RM2,280/MT (1HFY17: RM2,871/MT), respectively. The decline in prices was partly attributable to the strengthening of the RM against the US$. On the back of lower revenue, KLK’s PBT for 1HFY18 declined by 15.8% yoy to RM730.4m. After excluding the surplus on disposal of land and other one-off items, 1HFY18 core net profit declined by 29.9% yoy to RM470.2m, which accounts for 40% of both our previous and the street’s FY18 forecasts, respectively. This came in below our and the street’s expectations and the variance was mainly due to the lower-than-expected contribution from the plantations (due to lower CPO production and ASP) and property divisions. An interim DPS of 15 sen was announced (1HFY17: 15 sen).

Weaker Sequentially

Sequentially, KLK’s 2QFY18 revenue declined by 9.8% qoq to RM4.7bn on the lower contribution from the plantations and manufacturing divisions. The EBITDA margin weakened by 2.4 ppt qoq to 8.6%, mainly due to lower CPO and PK ASPs. 2QFY18 core net profit, after excluding for one-off items, declined by 48.3% qoq to RM160.3m.

Source: Affin Hwang Research - 17 May 2018