Period  4Q14/FY14

Actual vs. Expectations FY14 core net profit* (CNP) of RM1.03b is below expectation as it account for only 93% of consensus forecast (RM1.11b) and 82% of ours (RM1.26b).

 The key factor behind the variance is the unexpected loss of RM5m in its manufacturing division, which is the first loss in three years. We gather that the oleochemical sub-division in the manufacturing division suffered a write down of RM13m in 4Q14 due to a sharp drop in its selling products.

 Additionally, CPO price realised is also below expectations in 4Q14 at RM2,293/MT (against our expectation of RM2,500/MT).

Dividends  Final dividend of 40.0 sen was announced and this is below our earlier expectation of 53.5 sen. We believe that this is due to the lower-than-expected earnings as caused by reason stated above.

 Overall, full year FY14 dividend is 55.0 sen translating into dividend yield of 2.4%.

Key Results Highlights YoY, FY14 CNP increased 13% to RM1.03b due to good performance from the plantation division (EBIT +29% to RM1.01b). However, the earnings growth is limited by lower earnings from manufacturing division (EBIT -13% to RM288m). The plantation division benefited from better CPO prices (+5% to RM2,396/MT) and FFB growth of 3% to 3.73m MT. However, manufacturing division’s EBIT declined due to loss incurred in 4Q14.

 QoQ, 4Q14 CNP declined 32% to RM171m due to loss of RM5m in manufacturing division (EBIT -50% to RM71m).

Plantation division’s EBIT was flat (+1% to RM232m) as FFB growth of 16% to 1.01m MT was just enough to cover lower CPO prices by 9% to RM2,293/MT.

Outlook  Manufacturing division margin declined to 5.1% in FY14 (from 7.0% in FY13) and we believe that the outlook may be challenging for this division going forward. This is due to more capacity coming on-stream in the industry.

 On the plantation division, we are concerned about the recent CPO price trends due to global trend of strengthening

US Dollar and low crude oil prices. Hence, we are looking to revise lower our CPO price forecast soon, which will drag FY15E-FY16E earnings.

Change to Forecasts Our earnings forecast for both FY15E and FY16E are UNDER REVIEW with downside bias. The earnings cut for KLK is likely to be higher than other pure planters as we are likely to lower our manufacturing division’s margin and also applying lower CPO prices estimate. Our current estimate for both FY15E and FY16E CPO prices is RM2,500/MT.

Rating Maintain MARKET PERFORM

 Due to KLK’s big cap status and scarcity of Shariah compliant stocks, we are likely to keep the recommendation downside bias to our TP due to the potential earnings trimming for both FY15E and FY16E. We are also looking to review our valuation metrics as well.

Valuation  Our TP is UNDER REVIEW as our FY15E-FY16E EPS are UNDER REVIEW. Our last TP of RM23.80 is based on valuation of 21.0x Fwd. PE to FY15 EPS of RM1.14.

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

 Lower-than-expected margin for downstream division.

Source: Kenanga