Period  2Q14/1H14

Actual vs. Expectations  KLK 1H14 core net profit* (CNP) of RM611m is in line as it makes up 50% of consensus forecast (RM1.21b) and 47% of our forecast (RM1.30b) for full FY14.

Dividends  As expected, a dividend of 15.0 sen was announced.

Key Results Highlights YoY, 1H14 CNP increased 31% to RM611m due to good performance from both downstream division (EBIT +48% to RM223m) and plantation division (EBIT +18% to RM545m). The robust earnings growth in downstream division is caused by higher sales volume of fatty acids and specialties products, favourable fatty alcohol business and improved contribution from European operations. Meanwhile, plantation division benefited from better CPO prices (+5% to RM2392/MT).

 QoQ, 2Q14 core net profit improved 15% to RM327m due to significantly better earnings from downstream division (EBIT +71% to RM140m). Reason behind this is as explained above. Plantation division EBIT grew 13% to RM289m due to improved CPO prices (+9% to RM2499/MT).

Outlook  Management guided for improved profit in FY14 against FY13. This is in line with our forecast of 42% 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

 We believe that the 31% CNP growth in 1H14 will provide the short-term positive catalyst for the stock.

Valuation  Increase our TP to RM27.00 (from RM26.10) after rolling our valuation of 21.2x Fwd. PE to FY15 EPS of RM1.27. Previously, we are using CY14E EPS of RM1.23.

Risks  Lower-than-expected CPO prices.

 Lower-than-expected margin for downstream division.
 

Source: Kenanga