Kuala Lumpur Kepong Berhad’s (KLK) recorded 9M17 Core Net Profit* (CNP) of RM842m, broadly within consensus’ RM1.22b estimate at 69% and within our forecast RM1.20b at 70%. No dividend was announced, as expected. No change to our CNP estimates. Maintain MARKET PERFORM with slightly lower TP of RM26.40 (from RM26.56) on updated Fwd. PER of 22.9x (from 23.5x), with mean valuation basis unchanged.

9M17 within our forecast. 9M17 CNP at RM842m was broadly within consensus (RM1.22b) at 69% and within our forecast (RM1.20b) at 70%, coming in softer on manufacturing losses from PK price volatility. FFB production at 2.87m MT was in line, making up 74% of our full- year estimate. No dividend was announced, as expected.

Upstream over downstream. YoY, CNP improved 18% on the back of a 68% jump in upstream operating profit due to both higher CPO prices (+27%) and FFB production recovery (+11%). Downstream earnings, however, fell 73% in spite of PK price increase (+54%). This was due to sharp volatility in 1HCY17, as prices traded between RM3,953/MT (mid-Apr) and RM8,429/MT (end-Jan) causing price mismatch and customers to turn cautious. QoQ, CNP weakened 39% as upstream core operating profit (ex-forex losses of RM25.7m in 3Q17 and RM3.8m in 2Q17) softened 29% to RM263m. This was due to lower CPO prices (-11% to RM2,674/MT) while FFB volume was fairly flat at +1%. Downstream segment saw losses on PK price volatility resulting in a stock write-off totaling RM60.3m.

Better production prospect. Management noted that plantation profit should improve on higher FFB production post-El Nino. We concur given the strong production recovery shown especially in Peninsular Malaysia, of which c.27% of KLK’s planted area is located, second only to SIME’s c.37% among planters under our coverage. However, this may be offset by softer CPO prices as production improves regionally. While management expects lower oleochemical contributions for the full-year, we expect to see margin improvement in 4Q17 as PK prices have stabilized closer to RM4,000/MT. Meanwhile, in the long run, KLK has demonstrated its appetite for M&A with its bid on MP Evans. Hence, we would not be surprised to see fresh efforts from KLK to expand its plantation land bank in FY17-18.

No change to FY17-18E CNP of RM1.20-1.21b as 9M17 CNP came within our expectations.

Reiterate MARKET PERFORM with lower TP of RM26.40 (from RM26.56) as we update our applied Fwd. PER to 22.9x (from 23.5x) while updating our valuation base year to CY18 (from average CY17- 18) for higher Fwd. EPS of 115.3 sen (from 113.0 sen). No change to our mean valuation basis as we expect the decent upstream and downstream prospect to be offset by soft investor sentiment, given that CPO prices are likely to weaken further on regional production uptrend. As a result, we maintain our MARKET PERFORM call on KLK.

Source: Kenanga Research - 16 Aug 2017