KLK’s 9MFY18 core net profit of RM616m accounted for 66% and 56% of our previous FY18 forecast and the consensus, respectively. Profits from the plantations and property divisions were lower yoy (the former due to lower CPO and PK ASPs, and the latter due to recognition of development profits from a particular phase with a lower margin), while the manufacturing segment’s profit increased (due to better margins). We have cut our FY18 core EPS forecast by 15%, but we keep our FY19-20 core EPS forecasts unchanged. We maintain our HOLD rating on the stock with an unchanged target price of RM23.20, based on 22x our CY2019E core EPS.

9MFY18 Results Below Expectations

Kuala Lumpur Kepong’s (KLK) 9MFY18 revenue declined by 10.3% yoy to RM14.2bn due to lower contribution from the plantations and investment holding divisions, but this was partially offset by higher contribution from the manufacturing and property development divisions. For 9MFY18, KLK’s FFB production was up marginally by 1.2% yoy to 2.9m MT, while CPO and PK ASPs were lower at RM2,428/MT (9MFY17: RM2,793/MT) and RM2,094/MT (9MFY17: RM2,664/MT), respectively. Prices of most vegetable oils, including palm oil, have been under pressure with the improvement in global production coupled with the trade tensions between the US and China. On the back of lower revenue, KLK’s PBT for 9MFY18 declined by 11.4% yoy to RM947.2m. After excluding the surplus on disposal of land and other one-off items, the 9MFY18 core net profit declined by 27.5% yoy to RM615.6m, which accounts for 66% of our previous and 56% of the street’s FY18 forecasts, respectively. This came in below our and the street’s expectation due mainly to the lower-than expected contribution from the upstream plantations division.

Weaker Sequentially on Lower Prices and Sales Volume

Sequentially, KLK’s 3QFY18 revenue declined by 7.5% qoq to RM4.3bn on lower contribution from the plantations and manufacturing divisions. This was mainly due to lower CPO and PK ASPs as well as lower sales volumes. The 3QFY18 core net profit, after excluding one-off items, was flat qoq at RM160.8m.

Maintain HOLD Rating on KLK With An Unchanged TP of RM23.20

We cut our FY18 core EPS forecast by 15% due to the weak 9MFY18 results, but keep our FY19-20 core EPS forecasts unchanged as we expect CPO production and prices to increase. We maintain our target price on KLK at RM23.20, based on an unchanged 22x PER on our CY2019E EPS. We maintain our HOLD rating on the stock.

Key Risks

Key upside/downside risks include: 1) a stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 15 Aug 2018