Period a 3Q14/9M14

Actual vs. Expectations KLK 9M14 core net profit* (CNP) of RM861m is in line as it makes up 72% of consensus forecast (RM1.19b) and 70% of our forecast (RM1.23b), for FY14.

Dividends  None as expected.

Key Results Highlights YoY, 9M14 CNP increased 37% to RM861m due to good performance from both plantation division (EBIT +35% to RM775m) and downstream division (EBIT +33% to RM293m). The plantation division benefited from better CPO prices (+7% to RM2430/MT). Meanwhile, the robust earnings growth in downstream division is due to improved fatty alcohol business and better results from European operations.

 QoQ, 3Q14 CNP declined 23% to RM251m due to lower earnings from downstream division (EBIT -50% to RM71m). We gather that higher production cost (possibly from raw materials such as CPO and CPKO) has squeezed margin in the downstream division.

Outlook  Short-term outlook is good as management guided for improved profit in FY14 against FY13. This is in line with our forecast 35% earnings growth in FY14E to RM1.23b.

 However, the long-term outlook may be uncertain due to potential restriction of foreign ownership of plantations to no more than 30% (from the current 95%) in Indonesia.

 Note that KLK has planted area of 101,885 ha in Indonesia or 53% of its total planted landbank.

Change to Forecasts   Maintain our earnings forecast for both FY14E (RM1.23b) and FY15E (RM1.21b).

Rating Maintain MARKET PERFORM

 Although FY14E earnings growth is good at 35%, the prospect of having flat earnings in FY15E means limited share price upside.

Valuation  Maintain our TP of RM25.00 based on valuation of 22.0x Fwd. PE to FY15 EPS of RM1.16. Our 22.0x Fwd. PE is based on mean valuation.

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

 Lower-than-expected margin for downstream division.

Source: Kenanga