Kuala Lumpur Kepong (KLK)’s FY16 Core Net Profit (CNP*) at RM1.04b was within expectations at 100% and 102% of consensus and our forecast, respectively. DPS of 35.0 sen announced totaling FY16 DPS to 50.0 sen, below our 74.0 sen forecast as gains on land disposal were retained. Made no changes to earnings estimates. Maintain MP call and TP of RM25.00 based on 24x PER on CY17E EPS.

FY16 meets expectations. KLK’s FY16 CNP at RM1.04b met consensus’ RM1.04b forecast (100%) and was in line with our RM1.02b forecast (102%), on the back of deferred tax recognition of RM268.9m related to revaluations in its Indonesian biological assets. A final dividend of 35.0 sen was announced for full-year dividend of 50.0 sen, below our 74.0 sen forecast as KLK’s gains on land disposal (RM537.2m) were retained. FFB production at 3.49m MT was within as well, making up 97% of our forecast of 3.61m MT.

Solid downstream improvement. YoY, CNP improved 32%, as core downstream operating profit rose 37% on top line improvement (+24%) due to improved European volumes, and margin improvement (5.0%, from 4.6%) on the better economies of scale. Upstream profit improved 6% as CPO price improvement (+8%) partly offset weaker FFB volume (-8%). QoQ, CNP rose 51% on deferred tax recognition of RM268.0m related to the revaluation of certain biological assets in Indonesia. Core operating profit declined by 10% as downstream operating profit declined 45% on higher CPKO prices, which weakened margins (3.4% from 6.8%). This was partly offset by upstream improvement (+5%) due to better FFB volume (+15%).

Support from upstream. Looking ahead, we think the 1Q17 upstream segment is likely to see improvement as quarter-to-date (QTD) CPO prices have improved 10% to RM2,750/MT while production should be on par with 4Q16. However, the downstream segment, especially on the oleo-chemical business, could continue to see weakened margins as QTD PK prices have increased 18% to RM2,800/MT. Meanwhile, the ongoing acquisition process for Indonesian planter MP Evans could pose uncertainty as we reckon any further increase to KLK’s offer price of GBP740 pence/share would strain KLK’s balance sheet going forward.

Maintain FY17E CNP at RM1.10b as we introduce our FY18E CNP of RM1.15b. No change to our earnings forecast as 4Q16 came in line with expectations. However, we lower our dividend pay-out estimate to 55% from 60%, to reflect the latest 3-year average core payout ratio of 56%. As a result, our FY17E DPS is reduced to 55.0 sen from 60.8 sen.

Reiterate MARKET PERFORM and TP of RM25.00 based on a Fwd. PER of 24.0x applied to CY17E EPS of 104.2 sen. Our Fwd. PER of 24.0x implies mean valuation, which we believe is justified by KLK’s positive upstream prospects but weaker downstream outlook. No change to our MARKET PERFORM call as the ongoing MP Evans acquisition poses uncertainties to investors

Source: Kenanga Research - 17 Nov 2016