KL Kepong’s (KLK) 9MFY19 core net profit of RM499.6m (-23.2% yoy) came in below our expectation due to a weaker-than-expected EBITDA margin. Lower profits were seen at the plantation and manufacturing divisions due to weaker CPO and PK prices, negating the higher earnings in the property and investment holding segments. We cut our FY19-21E core EPS by 2-5%, mainly to take into account a lower contribution from the plantation division. As such, our DCFderived target price has been lowered to RM24.00; maintain HOLD.

9MFY19 Earnings Impacted by Weak CPO Prices

Kuala Lumpur Kepong’s (KLK) 9MFY19 revenue and PBT fell by 17.3% and 26.3% yoy, respectively, to RM11.7bn and RM577.2m. The decline in KLK’s revenue was due to lower contributions from the plantation and manufacturing divisions, but was partially mitigated by higher contributions from the property and investment holding divisions. For 9MFY19, KLK’s CPO production increased by 5.3% yoy to 663.8k MT; however, CPO and PK ASPs were lower at RM1,925/MT (9MFY18: RM2,428/MT) and RM1,263/MT (9MFY18: RM2,094/MT), respectively. CPO prices in 9MFY19 came under pressure partly due to ample supply of other edible oils in the market, weak market sentiment as well as the ongoing trade tensions between the US and China. After excluding a surplus on government land acquisition, forex gains, gain on derivatives, impairment and other one-off items, KLK’s core net profit was down by 23.2% yoy to RM499.6m. This came in below our previous and consensus expectations, accounting for 71.4% and 67.4% of our and consensus FY19E forecasts respectively. The variance to our forecast was mainly due to the lowerthan-expected EBITDA margin given the weak CPO prices.

Higher Core Net Profit Sequentially, Up 29% to RM183.8m

Sequentially, KLK’s 3QFY19 revenue declined by 6% qoq to RM3.7bn, while PBT (which is inclusive of forex gains and an impairment of an estate in Liberia of c. RM145.3m) plunged by 77.2% qoq to RM44.8m. Higher profits from manufacturing, property and investment holdings were negated by lower plantation profit. After excluding the one-off items, KLK’s 3QFY19 core net profit improved by 29.3% qoq to RM183.8m.

Target Price Lowered to RM24.00, Maintain HOLD Rating

Given the weaker-than-expected 9MFY19 results, we trim our FY19-21E core EPS by 2-5%, mainly to take into account the lower contribution from the plantation division. For KLK, we expect CPO ASP to average RM1,980- 2,400/MT for FY19-21E from RM2,100-2,450/MT previously. After our earnings forecast revisions, our DCF-derived TP has been lowered to RM24.00 (from RM24.20 previously). We maintain our HOLD rating on the stock.

Key Risks

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

Source: Affin Hwang Research - 21 Aug 2019