Kuala Lumpur Kepong Berhad’s (KLK) FY17 Core Net Profit* (CNP) of RM1.07b missed both consensus and our forecast at 92% and 89%, respectively, on weaker downstream performance. A final dividend of 35.0 sen was announced, raising FY17 dividend to 50.0 sen, missing our 61.1 sen estimate at 82%. We reduce our FY18E CNP by 8% to RM1.15b as we introduce FY19E CNP of RM1.22b. Maintain MARKET PERFORM with lower TP of RM25.00 (from RM26.40).

FY17E below expectations. KLK recorded FY17 CNP of RM1.07b, missing consensus’ RM1.16b forecast at 92% and below our RM1.20b estimate at 89% owing to soft downstream performance. Production at 3.91m metric tons was in line at 99% of our forecast. Meanwhile, a final dividend of 35.0 sen was announced, raising FY17 DPS to 50.0 sen, matching FY16 DPS but falling short of our 61.6 sen forecast at 82%.

Downstream drawback. YoY, CNP improved 5% largely on better upstream performance (+58%) thanks to production recovery (+11%) which was complemented by higher CPO (+20%) and PK (+35%) prices. However, this was offset by lower downstream segment performance, which excluding impairments and fair value derivatives movements sank 80% to RM209m due to higher and volatile input cost. Note that FY16 recorded sharply lower tax rates due to a one-off revaluation of its Indonesian biological assets. QoQ, CNP improved 26% with upstream operating profit rising 24% thanks to higher FFB production (+9%) despite slightly lower CPO (-4%) and PK (-2%) prices. On a core basis, downstream segment operating profit doubled (+114%) to RM117m, partly due to a low base effect, though the segment saw better stability in raw material cost and better sales volume.

Recovery prospect. In line with the industry view, management foresees palm production recovery in 2018 to put pressure on CPO prices, although profitability should remain “satisfactory”. Downstream performance should see improvement as PK prices moderate while we think better crude oil prices should improve demand for oleochemical products as an alternative. Management mentioned that their efforts to turn around underperforming businesses have produced encouraging results, which bodes well for 2018.

Lower FY18E CNP by 8% to RM1.15b as we introduce FY19E CNP of RM1.22b as we moderate our previously optimistic FY18E downstream recovery expectations. We also introduce our FY19E CNP of RM1.22b implying earnings growth of 6.3% amid a modest FY18- 19E FFB growth outlook of 6-3% (against sector average of c.8%).

Maintain MARKET PERFORM with lower TP of RM25.00 (from RM26.35) accounting for lower CY18E EPS of 109.2 sen (from 115.1 sen) applied to unchanged Fwd. PER of 22.9x. No change to our mean valuation basis as we expect upstream productivity to be offset by lower prices, while downstream prospects should stabilize gradually. Thus, we reiterate our MARKET PERFORM call on KLK.

Source: Kenanga Research - 23 Nov 2017