KLK’s 1QFY20 core net profit of RM181.3m (+3.8% yoy) came in largely within our expectations. Higher profits were seen at the plantation (due to higher CPO prices) and property divisions, negating the lower contributions from the manufacturing and investment holding segments. We leave our FY20-22E core EPS unchanged as there were no major surprises to KLK’s 1QFY20 results. We maintain our BUY rating on KLK with an unchanged DCFderived TP of RM26.90, as we expect earnings to improve on the back of higher CPO prices.

1QFY20 Core Net Profit at RM181.3m – Largely Within Expectations

Kuala Lumpur Kepong’s (KLK) 1QFY20 revenue was flattish yoy at RM4.1bn (-0.2% yoy). Revenues from the manufacturing and investment holding divisions were down by 12.8% and 26.9% yoy, respectively, to RM1.9bn and RM105.3m, but this was partially offset by higher revenue contributions from the plantation and property divisions, up 17.7% and 31.2% yoy, respectively, to RM2bn and RM52.2m. Meanwhile, KLK’s PBT declined by 22.8% yoy to RM259.8m (previous 1QFY19 had profits on disposal of land and gain on derivatives). For 1QFY20, KLK’s CPO production declined by 11.5% yoy to 977.96k MT; however, the CPO ASP was higher at RM2,207/MT (1QFY19: RM1,840/MT). We believe the stronger demand growth rate for palm-oil products as compared to production growth, has boosted CPO prices in 1QFY20. The 1QFY20 core net profit, after excluding for one-off items, was higher by 3.8% yoy to RM181.3m. This came in largely within our expectation, accounting for 21% and 20% of our and consensus FY20E core earnings respectively.

Stronger Sequentially

Sequentially, KLK’s 1QFY20 revenue and PBT increased by 7.2% and 5.3% qoq, respectively to RM4.1bn and RM259.8m. The qoq improvement was mainly due to an increase in ASPs of CPO and PK, offsetting the drop in production. After adjusting for one-off items, KLK’s 1QFY20 core net profit was higher by 5.8% qoq to RM181.3m.

TP Unchanged at RM26.90, Maintain BUY Rating on KLK

We make no major changes to our FY20-22E core EPS and maintain our DCF-derived target price on KLK of RM26.90. We expect FY20E to be a better year for KLK, after a lackluster year in FY19, on the back of higher CPO prices. We believe CPO prices will be supported by the tightness in global supply of vegetable oils. We maintain our BUY rating on KLK.

Key Risks

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

Source: Affin Hwang Research - 18 Feb 2020