• KLK’s FY20 core net profit was higher by 17.2% yoy to RM769.3m, but this came in below our expectation due to a weaker-than-expected contribution from its plantation division given the lower CPO ASP achieved for the year.
• Despite the disappointing FY20 results, we raise our FY21 core EPS forecast by 5.9% mainly to take into account our higher CPO assumption of RM2,625/MT, but lower our FY22E core EPS by 1.7% given the lower CPO ASP assumption of RM2,525/MT.
• Maintain HOLD rating on KLK but with a new DCF-derived TP of RM24.68.

FY20 core net profit at RM769.3m – below expectations

Kuala Lumpur Kepong’s (KLK) FY20 revenue was slightly higher at RM15.6bn, up 0.4% yoy. Revenue from the plantation division (external only) was up by 10.4% yoy to RM7bn, but this was partially offset by lower revenues from the manufacturing, property development and investment holding divisions, down by 6.4%, 9.1% and 10.4% yoy, respectively, to RM8.2bn, RM154.9m and RM234.7m. KLK’s FY20 PBT which includes forex loss, loss on derivatives, provisions and surplus on disposal of land, increased by 43.9% yoy to RM1.2bn. This was attributable to better performance from the plantation (due to better CPO prices), manufacturing (due to better margins in Malaysia and Europe operations) and property (due to recognition of profit from projects with better margins) divisions. For FY20, FFB production declined by 4.3% yoy to 3.93m MT; however, CPO ASP was higher at RM2,344/MT (FY19 ASP: RM1,924/MT). KLK’s FY20 core net profit, after excluding one-off items, was higher by 17.2% yoy to RM769.3m, but this came in below our and consensus expectations, accounting for 93% of both our and consensus FY20E core earnings forecasts and the variance to our forecast was due to weaker-thanexpected contribution from its plantation division given the lower CPO ASP achieved.

Sequentially stronger core net profit at RM194.6m, up 17.2% qoq

For 4QFY20, KLK’s revenue was higher by 7.9% qoq at RM4bn but its PBT declined by 31% qoq to RM336.3m (due to forex losses in 4QFY20 vs forex gains in 3QFY20). KLK’s FFB production was up by 3.2% qoq to 1.05m MT while CPO selling prices registered at RM2,389/MT (3QFY20 ASP: RM2,239/MT). The higher selling price in 4QFY20 was partly attributable to the improved demand, tight stock levels, increase in prices of other edible oils and weather uncertainties. However, KLK’s CPO ASP in 4QFY20 was much lower than the spot average prices of c. RM2,700-2,750/MT as they may have entered into forward sales too early, in our view. Nevertheless, after adjusting for one-off items, KLK’s 4QFY20 core net profit was higher by 17.2% qoq at RM194.6m. KLK will recommend the payment of a final dividend at a later date (ytd FY20 total DPS at 15 sen vs FY19 total DPS at 50 sen).

Maintain HOLD rating on KLK but with a new TP of RM24.68

Despite the disappointing FY20 results, we raise our FY21 core EPS forecast by 5.9% mainly to take into account our higher CPO ASP assumption of RM2,625/MT (from RM2,500/MT previously), supported by tight palm-oil stock levels, concerns over lowerthan-expected CPO production, an increase in prices of other edible oils and weather uncertainties. However, we lower our FY22E core EPS by 1.7% given the lower CPO ASP assumption of RM2,525/MT from RM2,550/MT previously. Our DCF-derived target price is now slightly higher at RM24.68 (from RM24.64 previously) and we maintain our HOLD rating on KLK.

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 - 19 Nov 2020