Period    4Q12 and FY12

Actual vs. Expectations  The FY12 core net profit* of RM1.13b was within both the consensus and our estimates. It made up 95% of the consensus' forecast of RM1.19b and 99% of our forecast of RM1.14b.

Dividends   As expected, a final single tier dividend of 50.0 sen was announced. Combined with its earlier interim dividend of 15.0 sen, FY12 total dividend was at 65.0 sen, implying decent 3.2% yield.

Key Results Highlights  YoY, the FY12 core net profit declined 20% to RM1.13b due to a lower EBIT in the plantation division (-26% to RM1.18b). Note that the CPO ASP was down 4% at RM2829/mt while the FFB production was lower by 1% at 3.26m mt. We also believe that the production cost may have increased by a minimum 15% due to higher labour and fertiliser costs. The downstream division's EBIT meanwhile declined 17% to RM188m as the EBIT margin was lower at 3.7% (FY11: 4.4%). We believe this was caused by the introduction of the Indonesian palm oil export tax structure, which had dampened the margin for its Malaysian downstream operation.

 QoQ, the 4Q12 core net profit increased 11% to RM287m as a surge in the FFB production to 914,335 mt (+25%) more than offset the lower CPO ASP of RM2778/mt (-8%). The downstream division's EBIT declined 39% to RM51m as the EBIT margin weakened to 4.2% (3Q12: 6.3%), possibly due to weaker demand for oleochemical products from Europe and China.

Outlook   The CPO price outlook has deteriorated. With the cargo surveyors' exports data for the first 20 days of Nov showing a decline by ~3%, we see a higher possibility now of Nov MPOB's inventory level to register another record high.

Change to Forecasts  FY13E core net profit reduced by 10% to RM1.22b after cutting FY13E CPO price forecast by 5% to RM2850/mt (from RM3000/mt).

Rating  Downgrade to UNDERPERFORM

 Possible FY13E consensus earnings downgrade for KLK should cause pressure on the share price.

Valuation    We have cut our Target Price to RM20.00 based on an unchanged Fwd. PER of 17.5x on the lower FY13E EPS of RM1.15 (previously RM1.28).

Risks   Better than expected CPO prices.  

Source: Kenanga