KLK’s FY18 core net profit of RM782.9m accounted for 98% and 81% of our and consensus FY18 core EPS respectively. Plantations, property and investment holding profit were lower yoy, while manufacturing profit increased. Due to the weakness in CPO prices as well as our higher production cost assumptions, we cut our FY19- 20 core EPS forecasts by 22-23%. Given the earnings forecast revisions and despite a higher target PER of 26.5x (based on KLK’s 5- year mean after taking into account KLK’s size, status and liquidity; previously 22x) applied to our CY19E core EPS, we lower our 12- month TP to RM21.70. Given the downside potential, we downgrade KLK to a SELL rating.

FY18 Results Within Our Expectation

Kuala Lumpur Kepong’s (KLK) FY18 revenue declined by 12.4% yoy to RM18.4bn due to lower contribution from the plantation and investment holding divisions, but this was partially offset by higher contribution from the manufacturing and property development divisions. For FY18, KLK’s FFB production was up marginally by 1.4% yoy to 3.9m MT, while the CPO and PK ASPs were lower at RM2,335/MT (FY17: RM2,735/MT) and RM1,967/MT (FY17: RM2,534/MT), respectively. Prices of most vegetable oils, including palm oil, have been under pressure with the improvement in global production coupled with the ongoing trade tensions between the US and China. On the back of lower revenue, KLK’s PBT for FY18 declined by 23% yoy to RM1.1bn. Excluding the surplus on the government’s acquisition of land and other one-off items, FY18 core net profit declined by 28.8% yoy to RM782.9m, which accounts for 98% of our and 81% of the street’s FY18 core earnings forecasts respectively.

Weaker Sequentially on Lower Prices

Sequentially, KLK’s 4QFY18 revenue declined by 3.2% qoq to RM4.2bn on lower contribution from the plantation and manufacturing divisions. This was mainly due to lower CPO and PK ASPs but this was partially offset by higher FFB production. The 4QFY18 core net profit, after excluding for one-off items, was down by 4.7% qoq to RM153.3m.

Downgrade to SELL With Lower TP of RM21.70

Due to the weakness in CPO prices as well as our higher production cost assumptions mainly because of the increase in minimum wages in Malaysia, we cut our FY19-20 core EPS forecasts by 22-23%. Given the earnings forecast revisions and despite a higher target PER of 26.5x (based on KLK’s 5-year mean after taking into account KLK’s size, status and liquidity; previously 22x) applied to our CY19E core EPS, we lower our 12-month TP to RM21.70. Given the downside potential, we downgrade KLK to a SELL rating.

Key Risks

Key risks to our SELL rating include: 1) stronger-than-expected recovery in the global economy; 2) higher vegetable oil and crude oil prices; 3) strongerthan-expected FFB and CPO production; and 4) changes in government policies.

Source: Affin Hwang Research - 15 Nov 2018