Period     3Q13 and 9M13

Actual vs. Expectations   9M13 core net profit* of RM630m was below expectations, at 63% of consensus forecast (RM1.00b) and 59% of our forecast (RM1.07b) respectively.

1HCY13 CPO prices traded below our estimate of RM2500 due to the stronger than expected decline in soybean oil prices. Rubber price is also lower than expected due to a slowdown in the Chinese economy which may have affected demand for car tyres there.

Dividends    As expected, no dividend was announced.

Key Results Highlights   YoY, 9M13 core net profit declined 26% to RM630m as CPO prices dropped 20% to RM2268/mt. This was mitigated by 15% FFB growth to 2.69m mt and better earnings from downstream division (EBIT +62% to RM221m).

QoQ, 3Q13 core net profit slipped 21% to RM164m due to unexpected lower FFB production (down 13% to 747k mt) and lower earnings from downstream division (down 15% to RM71m). We believe lower FFB production QoQ could be caused by dry weather in its Sumatra estate while downstream division’s margin had eased from 7.2% in 2Q13 to 6.1% in line with thinner margin experienced by the industry.

Outlook    Current low CPO prices should limit the share price upside.

Change to Forecasts   FY13E earnings is reduced by 10% to RM960m after assuming lower CPO prices of RM2400 (previously RM2500) and lower rubber prices of RM9.50 (previously RM12.00). We also trim our FY14E earnings by 2% to RM1.23b after assuming lower rubber prices of RM11.00 (from RM12.00). Note that we are keeping our FY14E CPO prices unchanged at RM2700 due to our more optimistic view on CPO prices due to strong crude oil prices and weaker soybean production outlook from USDA going forward.

Rating  Maintain MARKET PERFORM

We advocate a “Buy On Weakness” strategy to collect KLK below RM20.

Valuation     Trim our TP to RM21.50 (from RM21.86) based on an unchanged Fwd. PER of 18.4x on lower CY14E EPS of RM1.17 (from RM1.19).

Risks    Lower than expected CPO prices.

Lower than expected downstream margin.

Source: Kenanga