Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit* (CNP) at RM380m came in below expectations; at only 37% of both consensus and our expectations of RM1.02b and RM1.03b, respectively.

This was largely due to lower-than-expected margin in its manufacturing division which was halved to 4% YoY which is also below our expected 6%.

Dividends

An interim dividend of 15.0 sen was announced, making up 33% of our revised FY15E dividend of 46.0 sen (previously 57.0 sen). This is within expectation as KLK historically paid out higher dividends in 4Q.

Key Results Highlights

YoY, 1H15 CNP slid 38% to RM380m as manufacturing segment’s EBIT dropped 53% to RM104m on softer margins in its oleochemical divisions which were significantly impacted by lower crude oil prices. Plantation segment EBIT also declined 26% to RM401m on lower CPO prices (-9% to RM2,170/MT) and FFB growth (-4% to 1.78m MT).

QoQ, 1Q15 CNP slipped 10% to RM180m largely on lower Plantation EBIT (-34%) as FFB volume declined 14% to 0.83m MT. This was partly offset by its manufacturing segment EBIT which doubled to RM68m on slightly improved fatty alcohol division’s results.

Outlook

Management highlighted that the current low crude oil prices have resulted in volatile fatty alcohol prices due to increased competition from synthetic alcohol. We think the outlook for the manufacturing division will remain challenging going forward due to more capacity coming on-stream in the industry.

In the plantation segment, we expect CPO prices to trade around our RM2,200/MT forecast. As we revise down KLK’s expected FFB growth to 2% (from 4%) which is below the sector average of 5%, we expect segment EBIT to be weaker in FY15E (-17% to RM833m).

Change to Forecasts

We slash our FY15-16E earnings forecasts to RM823m- RM951m (-20% and -9%) as we cut the oleochemicals division margin to 4%-5% (from 6%-6%) on the expectation that soft oil prices will continue to depress oleochemical margins in the near-to-mid-term. We also revise down our FFB growth expectations as outlined above.

Our expected FY15-16E dividend is also revised down to 46- 53 sen from 57-58 sen previously.

Rating

Maintain UNDERPERFORM

Maintain UNDERPERFORM call as we expect the increasingly challenging downstream outlook and flattish plantation segment’s prospects to persist for the immediate future.

Valuation

Although the results were disappointing, we are increasing our TP to RM21.66 (from RM20.34). This is because we have updated our 3-year mean valuation basis (applied on most planters under our coverage) which results in a 24x Fwd PER from 21x while we fully roll forward to FY16E core EPS from FY15E. Even so, our TP is still below the current price, which still warrants an UNDERPERFORM call. We reckon that plantation counters have been gaining some interests due to the onset of El-Nino. However, we caution investors that nearterm earnings disappointments will remain obstacles while the El-Nino effect will only be felt in early-2016.

Risks to Our Call

Higher-than-expected CPO prices.

Better-than-expected margin for its downstream division.

Source: Kenanga Research - 21 May 2015