Period

4Q15/FY15

Actual vs. Expectations

Kuala Lumpur Kepong (KLK)’s FY15 core net profit (CNP*) at RM788m is within our forecast (RM823m) at 96% but below consensus expectations (RM891m) at 88%.

We believe this was due to consensus’ overly optimistic view on full-year CPO prices (about RM2,350/ metric ton (MT)) compared to ours (RM2,200/MT) which is closer to KLK’s FY15 CPO selling price (RM2,106/MT).

Dividends

A final dividend of 30.0 sen per share was announced, for a full-year dividend of 45.0 sen which we deem as within our 45.7 sen forecast. Implied payout ratio is 61% with a dividend yield at 2.0%.

Key Results Highlights

YoY, FY15 CNP fell 24% to RM788m as Manufacturing EBIT declined 24% to RM219m on weaker oleochemical margins due to weak crude oil prices. Plantation segment’s EBIT also fell 22% as flattish FFB growth (+2% to 3.81m MT) was outweighed by lower CPO prices (-12% to RM2,106/MT).

QoQ, 4Q15 CNP slid 38% as Manufacturing EBIT declined 37% due to higher unrealised derivatives losses (4Q15: RM76m vs 3Q15: RM9m). Plantation EBIT was flat at RM190m as lower CPO prices (-8%) was offset by seasonal peak production (+6% to 1.04m MT). Note that dividend income from associate Synthomer Plc. was also lower this quarter (4Q15: RM15m vs 3Q15: RM53m).

Outlook

The Plantation segment outlook is improving as we expect CPO prices to trade between RM2,100-RM2,450/MT up to early-2016 (compared to FY15E average of RM2,200/MT), although KLK’s flattish FFB growth of 3% (vs. sector average of 6%) could limit upside.

We agree with management on the challenging Manufacturing segment outlook as low crude oil prices will likely compress fatty alcohol margins due to increased competition from synthetic alcohol. However, note that margins have stabilised between 2-5% and we expect this to continue, barring any further sharp drop in crude oil prices.

Change to Forecasts

No change to our FY16E earnings as we introduce our FY17E CNP forecast of RM1.14b.

Rating

Maintain MARKET PERFORM

Maintain MARKET PERFORM call as the challenging downstream outlook and flattish FFB growth prospects may limit upside on improving CPO prices.

Valuation

We increase our TP to RM22.80 (from RM21.80) as we roll forward our valuation base year to CY16 (from FY16) resulting in revised EPS of 95.0 sen (previously 90.9 sen) applied to an unchanged Fwd. PER of 24.0x.

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

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 19 Nov 2015