KLK’s 1HFY19 core net profit of RM317m (-35% yoy) was below expectations. Higher profits from the property and investment holding segments were negated by lower plantation and manufacturing profits due to weaker CPO and PK prices, We cut our FY19-21E core EPS by 11-18%, mainly to account for lower CPO price assumptions. We have changed our valuation method to DCF, however, with a revised TP of RM24.20 (from RM21.70), and upgrade the rating to HOLD from Sell. In our view, KLK’s valuation is fair considering the group’s size, shariah-compliant status and trading liquidity.

Results Below Expectations

Kuala Lumpur Kepong’s (KLK) 1HFY19 revenue and PBT fell by 18.6% and 6.6% yoy to RM8bn and RM532.4m respectively. The drop in revenue was attributable to lower contribution from the plantation and manufacturing divisions, but partially offset by higher contribution from the property and investment holding divisions. For 1HFY19, KLK’s CPO production increased by 5.2% yoy to 455.5k MT, but CPO and PK ASPs were lower at RM1,906/MT (1HFY18: RM2,487/MT) and RM1,340/MT (1HFY18: RM2,280/MT), respectively. CPO prices in 1HFY19 were under pressure partly due to the ample supply of other edible oils in the market, weak market sentiment as well as the ongoing trade tension between the US and China. KLK’s 1HFY19 reported net profit was higher by 15.3% yoy at RM393.9m, partly attributable to a lower tax rate. However, after excluding a surplus on government land acquisition, forex gains, gains on derivatives and other one-off items, KLK’s core net profit was down by 34.9% yoy to RM316.7m. This was below expectations, accounting for 37% and 34% respectively, of our previous and consensus FY19 forecast due to lowerthan-expected CPO prices.

Weaker Sequentially

KLK’s 2QFY19 revenue declined slightly by 3.5% qoq to RM3.9bn, while PBT plunged 41.7% qoq to RM196.1m. Plantation profit declined qoq, attributable to a 10.6% decrease in FFB production to 987.9k MT which resulted in higher production costs, although this was partially offset by a higher CPO price of RM1,969/MT vs. RM1,840/MT in 1QFY19. KLK’s 2QFY19 core net profit declined by 18.6% qoq to RM142.1m.

Source: Affin Hwang Research - 16 May 2019