KLK’s 6MFY20 core net profit of RM408.8m (+29.3% yoy) came in above our expectations, mainly due to higher contribution from the plantation division on stronger CPO prices. Given the better-thanexpected 6MFY20 results, we revise upwards our FY20 core earnings forecast by 14.6%. Nevertheless, we expect the subsequent quarters to be challenging with CPO prices falling under pressure amid concerns over a weak demand outlook. We maintain our SELL rating on KLK with a higher DCF-derived TP of RM18.60 as we roll forward our valuation horizon.

6MFY20 Core Net Profit at RM408.8m – Above Expectations

Kuala Lumpur Kepong’s (KLK) 6MFY20 revenue was slightly weaker yoy at RM7.9bn (-1.8% yoy). Revenues from the manufacturing, property development and investment holding divisions were down by 13.1%, 7.2% and 13.3% yoy, respectively, to RM3.9bn, RM69.2m and RM147m, but this was partially offset by higher revenue from the plantation division, up 14.4% yoy to RM3.8bn. KLK’s PBT, which includes forex loss, loss on derivatives and surplus on the disposal of land, declined by 31.9% yoy to RM362.3m. For 6MFY20, KLK’s FFB production declined by 10.7% yoy to 1.9m MT; however, CPO ASP was higher at RM2,373/MT (6MFY19: RM1,906/MT). We believe the expectation of lower production and a higher demand growth rate has boosted CPO prices in 6MFY20; however, the rally has diminished due to the Covid-19 outbreak and a plunge in crude oil prices. KLK’s 6MFY20 core net profit, after excluding for one-off items, was higher by 29.3% yoy at RM408.8m. This came in above our expectation, accounting for 66% of our previous FY20E core earnings, due to strongerthan-expected contribution from the plantation division.

Stronger Qoq Core Net Profit

KLK’s 2QFY20 revenue and PBT declined by 6.7% and 60.5% qoq, respectively to RM3.8bn and RM102.6m. The lower profit was partly due to the forex loss incurred in 2QFY20. Its CPO sales volume was lower in 2QFY20 due to a lower FFB production but this was partially cushioned by a stronger CPO selling price of RM2,572/MT. After adjusting for one-off items, KLK’s 2QFY20 core net profit was higher by 25.4% qoq at RM227.5m. KLK has declared a DPS of 15 sen (6MFY19 DPS: 15 sen).

Source: Affin Hwang Research - 28 May 2020