Period  1Q14

Actual vs. Expectations KLK’s 1Q14 core net profit* of RM284m is in line as it makes up 24% of consensus forecast (RM1.18b) and 22% of our forecast (RM1.30b) for FY14.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, 1Q14 core net earnings increased 10% to RM284m driven by downstream division EBIT, which improved 23% to RM82m as sales volume to the European market improved. However, earnings from the plantation division were slightly lower YoY (-5% to RM256m) due to lower CPO prices realized at RM2291/mt (-4% YoY). We believe this could be caused by dilution in realized CPO prices from Indonesia, which usually command lower selling prices due to differentials in the export tax structure.

 QoQ, 1Q14 core net profit was flattish at RM284m and this is in line with lower realized CPO prices at RM2291/mt.

Outlook  Management guided for improved profit in FY14 against FY13 on better outlook in both the plantation and manufacturing divisions.

 This is in line with our forecast of 42% net earnings growth in FY14E to RM1.30b.

Change to Forecasts  Maintain our earnings forecast for both FY14E (RM1.30b) and FY15E (RM1.36b).

Rating Maintain OUTPERFORM

 Although the 1Q14 results only met consensus expectation, we expect better earnings ahead from 2Q14 onwards due to the recent surge in CPO prices to above RM2700/mt. Given its big cap status and pure exposure to oil palm-related activities, we believe that KLK will attract investors’ attention as we expect CPO prices to continue to appreciate to RM2900/mt by end-March 2014.

Valuation  Maintain our TP of RM26.10 based on Fwd. PER of 21.2x on unchanged CY14E EPS of RM1.23.

The 21.2x Fwd. PER is pegged at +1.0SD over KLK’s 5-year Average Fwd. PE as we reckon KLK has the best FFB growth outlook among the big cap planters.

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected margins for downstream division.

Source: Kenanga