Result

• Kuala Lumpur Kepong (KLK) registered a net profit of RM360.7m in 1QFY17. After adjusting for foreign exchange gains and losses on derivatives, we derived core net profit of RM383.2m, which tumbled 14.2% qoq but surged 74.3% yoy. The performance in 1QFY17 was mainly lifted by plantation segment. Meanwhile, the slide on quarterly basis was caused by higher base in 4QFY16, which bolstered by non-taxable income and the recognition of deferred tax assets of RM268m related to the revaluation of biological assets by certain plantations subsidiaries in Indonesia.

• Broadly in line with expectations. The Group’s 3MFY17 core net profit of RM383.2m was broadly in line with ours and consensus expectation, achieving 32.6% and 34.2% respectively for the full year net earnings forecasts as we expect the earning to be soften in 2HFY17.

Comment

• Compelling plantation segmental performance was backed by better selling prices and FFB production. Plantation segment’s revenue elevated to RM2978.5m in 1QFY17 (+31.1% qoq, +21.4% yoy) with operating profit of RM422.3m (+90.1% qoq, +30.4% yoy). Quarter-on-quarter performance was lifted by favourable selling price of Crude Palm Oil (CPO) (+9% qoq) and Palm Kernel (+10.7% qoq) coupled with higher FFB production (+16.3% qoq). Meanwhile, year-on-year performance was lifted by strong growth of selling prices in both CPO (+38.8% yoy) and Palm kernel (+111% yoy) which outweighed a marginal slide in FFB production (-1% yoy).
• Higher feedstocks cost eroded margin in manufacturing segment despite growth in sales. Manufacturing segment registered improved revenue of RM2330.6m in 1QFY16, rising 7.4% qoq and 30.4% yoy. However, EBIT recorded a scant operating profit of RM38.9m (+608% qoq, -71% yoy). The insipid performance was mainly attributed to higher raw material CPKO price which resulted in an operating margin of 1.7% (+1.4pts qoq, -5.8 pts yoy). Moving forward, the manufacturing segment is believed to face challenging outlook in view of the higher raw materials prices and severe competition that whittle margin.
• Looking forward, we believe 2nd quarter performance is underpinned by strong CPO price coupled with recovery in FFB production in view of low inventories and weak ringgit. The group expects the recovery in FFB production may weigh on the CPO price. However, forward sales have been committed are expected to mitigate the risk of declining CPO price.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY17F and FY18F.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM24.60. We derived our valuation based on target PER of 23x of FY17F EPS. We maintain our neutral stance on the Group due to its pricey valuation as we believe current share price has factored in the positive CPO price. On the fundamental, we opine that KLK’s outlook remains favourable given its stable growth rate in FFB production.

Source: JF Apex Securities Research - 15 Feb 2017