KL Kepong’s 12MFY19 core net profit of RM656.5m (-20.4% yoy) came in largely within our expectations. Lower profit was seen at the plantation division due to weaker CPO and PK prices, negating the higher earnings in the manufacturing, property and investment holding segments. After a weak FY19 performance, we expect KLK’s FY20-22E earnings to be stronger on the back of higher CPO prices (CPO price assumption raised to RM2,450-2,600/MT). After our upward earnings forecast revisions by 10.2%/9.1% for FY20E/FY21E, we raise our DCF-derived TP to RM26 from RM24. Given the potential upside of 15.6% to our new TP, we upgrade KLK to BUY from Hold.

Weak CPO Prices Adversely Impacted FY19 Earnings

Kuala Lumpur Kepong’s (KLK) 12MFY19 revenue and PBT fell by 15.5% and 16.7% yoy, respectively, to RM15.5bn and RM823.9m. The decline in KLK’s revenue was due to lower contributions from the plantation, manufacturing and property divisions, but was partially mitigated by a higher contribution from the investment holding division. For 12MFY19, KLK’s CPO production increased by 5.6% yoy to 903.4k MT; however, CPO and PK ASPs were lower at RM1,924/MT (12MFY18: RM2,335/MT) and RM1,210/MT (12MFY18: RM1,967/MT), respectively. CPO prices in 12MFY19 fell under pressure partly due to ample supply of other edible oils in the market, weak market sentiment as well as the ongoing trade tension between the US and China. After excluding a surplus on government land acquisition, forex gains, gains on derivatives, impairments and other oneoff items, KLK’s core net profit was down by 20.4% yoy to RM656.5m. This came in largely within our expectation, accounting for 96% and 99% of our and consensus FY19 core earnings respectively. According to KLK, a final dividend payment will be announced at a later date (ytd DPS of 15 sen).

Sequentially Weaker Core Net Profit, Down 6.7% to RM171.4m.

KLK’s 4QFY19 revenue increased by 2.6% qoq to RM3.8bn (due to increase in sales volume of CPO and PK), while PBT surged >100% to RM246.7m (the previous quarter had accounted for an impairment on an estate in Liberia for c. RM145.3m). However, after deducting the higher tax payment and excluding the one-off items, KLK’s 4QFY19 core net profit was lower by 6.7% qoq to RM171.4m.

Source: Affin Hwang Research - 20 Nov 2019