Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit* (CNP) at RM632m came in within our forecast (RM823m) at 77% but missed consensus’ expectations (RM928m) at 68%.

We believe this was due to consensus’ overly optimistic view on full-year CPO prices (about RM2,350/MT) compared to ours (RM2,200/MT) which is closer to KLK’s 9M15 CPO selling price (RM2,155/MT).

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 9M15 CNP fell 27% to RM632m as manufacturing segment EBIT dropped 41% to RM174m on weak oleochemical margins due to soft crude oil prices. Plantation segment’s EBIT also declined 24% as FFB growth (+2% to 2.76m MT) failed to offset lower CPO prices (-11% to RM2,155/MT).

QoQ, 3Q15 CNP jumped 40% due to better Plantation contribution on higher FFB production (+19% to 0.98m MT) despite slightly lower CPO prices (-4% to RM2,126/MT) as well as higher dividend income from its associate Synthomer PLC.

Outlook

In the plantation segment, we expect CPO prices to trade range-bound between RM2,000-RM2,300/MT for the rest of the year, while we expect KLK to register flattish FFB growth of 2% against sector average of 8%. Therefore, we expect lower FY15E Plantation segment EBIT (-12% to RM881m).

As for the manufacturing segment, management highlighted that the current low crude oil prices have resulted in volatile fatty alcohol prices due to increased competition from synthetic alcohol. Hence, they expect profit in FY15E to be lower than FY16E, which is in line with our forecast. However, note that margins have stabilised between 4-5% and we expect this to continue, barring any further sharp drop in crude oil prices.

Change to Forecasts

No change to our FY15-16E earnings.

Rating

Maintain MARKET PERFORM

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

Valuation

We maintain our TP of RM21.80 based on a Fwd. PER of 24x applied to FY16E core EPS of 91.0 sen.

Our Fwd. PER is based on 3-year mean valuation basis which we think is justified by KLK’s flattish FFB growth outlook and lower but stable manufacturing segment margins.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 20 Aug 2015