KLK’s 1QFY19 core net profit of RM175m (-45% yoy) came in largely within our expectation. Plantations and manufacturing division’s profit was lower yoy due to weaker CPO and PK prices, while property and investment holding segment’s profit increased. We leave our FY19-21E core EPS forecasts unchanged as there were no major surprises to KLK’s 1QFY19 results. We maintain our SELL rating on the stock given its lofty valuations. Target price is unchanged at RM21.70.

Results Largely Within Our Expectation

Kuala Lumpur Kepong’s (KLK) 1QFY19 revenue and PBT declined by 21.1% and 5.6% yoy, respectively, to RM4.1bn and RM336.4m. The drop in revenue was due to lower contribution from plantations and manufacturing divisions, but partially offset by higher contribution from the property and investment holdings divisions. For 1QFY19, KLK’s CPO production increased by 6.7% yoy to 238.1k MT, however, CPO and PK ASPs were lower at RM1,840/MT (1QFY18: RM2,581/MT) and RM1,375/MT (1QFY18: RM2,488/MT), respectively. The price of vegetable oils in 2018 fell under pressure with the improvement in global production as well as the trade tensions between the US and China. KLK reported a higher net profit by 6.6% yoy to RM250.9m in 1QFY19, attributable to the lower tax rate. However, after excluding surplus on government acquisition land, forex gain, gain on derivatives and other one-off items, KLK’s core net profit was down by 45.4% yoy to RM174.6m. This came in within our expectation but below street’s expectations, accounting for 21% and 18% of our and consensus FY19E forecasts. We expect higher profits for the coming quarters as CPO production and prices improve.

Stronger Core Net Profit Qoq

Sequentially, KLK’s 1QFY19 revenue declined slightly by 2.5% qoq to RM4.1bn on lower contribution from plantations, manufacturing and property divisions. This was mainly due to lower CPO and PK ASPs but partially offset by higher CPO production. Nevertheless, KLK’s 1QFY19 core net profit, after excluding for one-off items, improved sequentially by 13.9% to RM174.6m attributed to higher profit contribution from manufacturing and investment holding divisions due to better margins.

Source: Affin Hwang Research - 19 Feb 2019