Result

• Kuala Lumpur Kepong (KLK) registered a net profit of RM242.1m in 4QFY17. After adjusting for foreign exchange gains, loss on derivatives, impairment for available-for-sale investments and impairment of property, plant and equipment, we derived a core net profit of RM285.7m, which doubled qoq but slid 36% yoy. The stellar performance on qoq was lifted by growth in both plantation and manufacturing segments. Meanwhile, the lackluster yoy performance was mainly attributed to a tax expense of RM115m in current quarter as compared a tax expense of RM115m in current quarter.

• Cumulatively, 12MFY17’s core net profit was little changed (-0.4% yoy) despite a tax gains in 3QFY16 given a strong growth in plantation segment.

• Within expectation. The Group’s 12MFY17 core net profit of RM1082.3m was broadly in line with our and consensus expectation, matching 96.7% and 97% of the full year net earnings forecasts.

Comment

• Higher FFB production outweighed a retreat in CPO average selling price (ASP) in 4QFY17. Plantation segment’s 4QFY17 operating profit up 24.1% qoq, backed by higher FFB production (+8.6%) despite lower CPO (- 4.5% qoq) and Palm Kernel (-2.2% qoq) ASP. Meanwhile, 4QFY17 operating profit up 30.1% yoy given higher FFB production (+11.3%) and CPO ASP (+2.3% yoy) which outweighed a slide in Palm kernel ASP (-8.5% yoy). Cumulatively, higher FFB production (+10.8% yoy) coupled with higher ASP (CPO +20.5% yoy; Palm kernel +34.7% yoy) boosted 12MFY17 plantation performance with operating profit increased by 58.1% yoy to RM1307m.

• Manufacturing division turned profitable with better sales volume and improved margins in 4QFY17. However, 12MFY17’s performance bogged down by high feedstocks prices. Manufacturing segment posted a revenue of RM2556.7m in 4QFY17, which improved 6.6% qoq and 16.0% yoy. After removed one-offs, 4QFY17 Manufacturing’s operating profit up 170.1% qoq and 42.2% yoy given lower feedstocks prices. Meanwhile, 12MFY17 Manufacturing’s revenue increased by 28.2% yoy to RM9923m but operating profit dropped by 45% yoy (after adjusting for one-offs) given hike in feedstocks prices.

• Looking forward, the group expects plantation segment to contribute higher profit and strives to turn around manufacturing segment despite the industry is flush with excess capacities. Higher plantation profit is underpinned by the current CPO price coupled with higher FFB production.
• Proposed final single-tier dividend of 35sen per share with Ex-date on 19 Feb 2018. As such, total dividend for FY17 amounts to 50sen per share which translates into a dividend yield of 2%.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY18F and introduce earnings forecast for FY19F with a flattish yoy growth.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM25.50. We derived our valuation based on 23x FY18F 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 outlook of 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 Nov 2017