Result

• Kuala Lumpur Kepong (KLK) registered a net profit of RM141.9m in 3QFY18. After adjusting for foreign exchange gains, losses on derivatives and surplus of government acquisition of land, we derived a core net profit of RM154.8m, which inched down 0.9% qoq but improved 8.9% yoy.

• QoQ performance was mainly bogged down by low average selling prices (ASP) for CPO and Palm Kernel coupled with lower FFB production.

• Meanwhile, YoY performance was buoyed by manufacturing segment despite a lackluster performance in plantation segment.

• Below expectations. The Group’s 9MFY18 core net profit of RM608.8m below ours and consensus expectation, only matching 55.2% and 60.8% of the full year net earnings forecasts. The unfavourable earnings was a result of further deterioration in plantation margin in view of weak ASP.

Comment

• Plantation QoQ and YoY performance was eroded by lower ASP and contraction in margin. Plantation 3QFY18’s revenue down 11.6% qoq and 28.2% yoy to RM17215m. Similarly, operating profit tumbled 26.3% qoq and 41.7 yoy. The lackluster performance was a result of lower ASP for CPO (RM2302: -4% qoq and -13.9% yoy) and Palm Kernel (RM1695: -18.3% qoq and -23.3% yoy) and contraction in operating margin (-1.6 pts qoq and -1.8 pts yoy). Nevertheless, QoQ performance was further dragged down by lower FFB production (-3.4% qoq). However, YoY performance was slightly mitigated by higher FFB production (+0.5% yoy).

• On the same note, plantation segment 9MFY18’s operating profit slumped 42% yoy. Plantation segment 9MFY18’s revenue and operating profit down 23.8% yoy and 42% yoy respectively. The unfavourable performance was due to lower ASP for CPO (RM2428: -13.1% yoy) and Palm kernel (RM2094: -21.4% yoy) which outweighed higher FFB production (+1.2% yoy). Nevertheless, slide in margin (-3.0 pts yoy) further compounded the effect.

• Manufacturing segment enjoying stable feedstocks price (Crude Palm Kernel Oil) with a better YoY performance. However, QoQ performance was bogged down by unrealized loss arose from change in fair value of outstanding derivatives contracts. 3QFY18 registered operating profit of RM99.4m as compared to loss of RM5.1m in 3QFY17 in view of lower feedstocks price. Meanwhile, 3QFY18’s operating profit slid 21.1% qoq, after adjusting for unrealized losses of fair value change in derivatives contracts (RM50.8m) in 3QFY18 and gains (RM21.3m) in 2QFY18. 3QFY18’s operating profit surged 43.5% qoq. The better performance was mainly attributed to favuorable operating margin with reduced cost of raw materials.
• Nevertheless, manufacturing 9MFY18’s operating profit (+276.1% yoy) boosted by higher sales volume and low material costs. Revenue improved 4.4% to RM7692.6m. Similarly, operating profit elevated to RM379.9m, thanks to low material costs. As such, manufacturing segment enjoyed a better margin of 4.9% (+3.5 pts yoy).
• Looking forward, the group expects its plantation segment profit to be lower in view of prevailing weak CPO selling price. However, higher capacities utilization and operational efficiencies in Oleochemical operations should partly mitigate the impact.

Earnings Outlook/Revision

• We tweak down our earnings forecast for FY18F and FY19F by 17% and 4% respectively to account for margin contraction in the plantation segment.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM24.73 (RM25.67 previously) following our earnings cut. We peg our valuation at 23x FY19F EPS. We maintain our neutral stance on the Group due to its pricey valuation. On the fundamental, we opine that KLK’s outlook remains positive given its stable growth rate in FFB production.

Source: JF Apex Securities Research - 15 Aug 2018