Result

• Kuala Lumpur Kepong (KLK) registered a net profit of RM320.6m in 1QFY18. After adjusting for foreign exchange loss, gains on derivatives and surplus of government acquisition of land, we derived a core net profit of RM297.8m, which edged up 4.2% qoq but slid 22.3% yoy.

• The encouraging performance on QoQ was lifted by growth in manufacturing segment amid slide in both plantation and property development segments.

• Meanwhile, the lackluster YoY performance was mainly bogged down by plantation segment despite a growth in Manufacturing segment. Nevertheless, weak performance in property development aggravated downward pressure.

• Within expectation. The Group’s 3MFY18 core net profit of RM297.8m was in line with our and consensus expectation, matching 25.1% and 24.7% of the full year net earnings forecasts.

Comment

• Plantation segment’s operating profit fazed by contraction in margin on QoQ basis. Revenue inched up 1.1% qoq to RM2544.5m in 1QFY18m but operating profit down 6.3% qoq. Better revenue was a result of higher FFB Production growth (+2.5% qoq) and ASP (CPO+1% qoq, Palm kernel +15.1% qoq). However, operating profit was bogged down by increase in CPO production costs.

• Similarly, plantation segment’s operating profit tumbled YoY with lower margin coupled with low volume of sales. Revenue down 14.6% yoy in view of lower FFB production (-1.9% yoy) and ASP (CPO-5.1% yoy, Palm kernel - 6% yoy). Likewise, operating profit down 35.9% yoy given lower revenue and further eroded by lower operating margin (-3.5 pts yoy to 10.6%)

• Stable feedstocks price (Crude Palm Kernel Oil) and better operation efficiencies buoyed Manufacturing segment. 1QFY18’s operating profit surged 67.3% qoq and 297% yoy to RM154.6m, underpinned by RM2520m of revenue. The stellar performance was mainly attributed to favorable operating margin (+2.5 pts qoq and +4.5 pts yoy to 6.1%) given China new plant had enjoyed economies of scale.

• Lower development profits from Bandar Seri Coalfields project weighted on Property segment. 1QFY18’s operating nosedived 95.5% qoq and 94% yoy to RM1m in view of the dull demand.
• Looking forward, the group expects plantation segment profit to be affected by soft CPO ASP given high stockpile. However, higher capacities utilization and operational efficiencies in Oleochemical operations shall partly mitigate the effect.

Earnings Outlook/Revision

• No change in our earnings forecast for FY18F and FY19F.

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 steep valuation. On the fundamental, we opine that KLK’s outlook remains favourable given its stable growth rate in FFB production.

Source: JF Apex Securities Research - 13 Feb 2018