Result

• Kuala Lumpur Kepong (KLK) registered a net profit of RM289.6m in 2QFY17. After adjusting for foreign exchange losses and gains on derivatives, we derived core net profit of RM271.2m, which tumbled 29.2% qoq but surged 39.5% yoy. The lackluster qoq performance was bogged down by lower FFB yield which outweighed the higher average selling prices in CPO and Palm Kernel coupled with squeeze in manufacturing margin given higher feedstock price.

• Within expectations. The Group’s 6MFY17 core net profit of RM654.3m was in line with ours and consensus expectation, achieving 58% and 54.8% respectively for the full year net earnings forecasts.

Comment

• Lower FFB yield outweighed higher ASP in CPO and Palm kernel in 2QFY17 for plantation segment. Plantation segment’s revenue dropped to RM2775.3m in 2QFY17 (-6.8% qoq) with an operating profit of RM363.6m (- 13.9% qoq). The unfavorable performance was mainly due to drop in FFB yield (-13% qoq) despite higher ASP for CPO (+10.3% qoq) and Palm Kernel (17.5% qoq). On the flip side, year-on-year performance (+184% yoy) was boosted by strong growth of selling prices in both CPO (+36% yoy) and Palm kernel (+75.8% yoy) coupled with higher FFB yield (17.8% yoy). Overall, 6MFY17 plantation segment’s operating profit almost doubled to RM785.9m from RM398.8m a year ago, underpinned by higher FFB yield (+6.9% yoy) and higher selling price in CPO (+37.4% yoy) and Palm Kernel (+81.9%).
   
• Higher feedstocks cost eroded margin in manufacturing segment despite growth in sales. Manufacturing segment registered improved revenue of RM2638.8m in 2QFY17, rising 13.2% qoq and 43.9% yoy. However, adjusted EBIT for unrealized derivatives gains of RM33m recorded a scant operating profit of RM34m (-49.9% qoq, -64.2% yoy). The insipid performance was mainly attributed to higher raw material CPKO price which resulted an unappealing operating margin of 1.23% (-1.04pts qoq, -3.97 pts yoy). On the same note, 6MFY17 manufacturing segment’s revenue up 34.5% to RM4969.4m but operating profit plunged 53.5% to RM102m as higher cost of material whittled margins.
   
• Looking forward, we believe 3rd quarter performance is underpinned by recovery in the manufacturing segment with favorable feedstock prices. Meanwhile, 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.
   
• Single tier dividend of 15 sen per share with ex-date on 13 July 2017 has been proposed by the Board. As such, a total dividend of 50 sen/share has been declared for FY17, which translates into a dividend yield of 2% based on current share 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 - 23 May 2017