Kuala Lumpur Kepong Berhad (KLK) recorded 1Q18 Core Net Profit* (CNP) of RM356m, within consensus estimates at 30% and broadly within our forecast at 31%. No dividend was announced, as expected. We maintain our FY18-19E CNP at RM1.15-1.22b. No change to our MARKET PERFORM call but TP is raised to RM25.75 (from RM25.00) as we roll forward our valuation base year to average CY18-19E.

1Q18 meets expectations. 1Q18 CNP came in at RM356m, within consensus’ RM1.20b forecast at 30%, and making up 31% of our RM1.45b forecast. We deem this broadly within expectations as we observe that 1Q tends to be KLK’s strongest quarter, making up on average 30% of full-year earnings in the last 5 years. Meanwhile, FFB production at 1.02m metric tons (MT) was within our estimate at 25%. No dividend was declared, as expected.

Better downstream performance. YoY, CNP weakened 4% as upstream core operating profit (excluding forex gains/losses) declined 20% on lower CPO (-5%) and PK (-6%) prices coupled with softer FFB production (-2%) on weaker Indonesian production coming from wetter year-end weather. Downstream core operating profit (excluding derivatives gains/losses), however, strengthened with a solid 89% increase thanks to stable input costs. QoQ, CNP improved 57% on lower tax charges (-14%) as well as better downstream core contribution (+10%), led by oleochemicals margin improvements. Upstream core contribution was largely flat (-2%) despite slightly improved FFB volumes (+3%) and better palm kernel prices (+15%) due to higher operating costs.

Downstream improvement to offset softer CPO prices. Management observed that CPO price declines were due to post El Nino FFB production recovery leading to higher CPO inventories. However, we expect weaker plantation profit to be offset by stronger Oleochemical performance thanks to stable input prices, better utilization and potentially better demand should crude oil prices resume their uptrend. Meanwhile, we see modest, but stable long-term upstream growth as the company embarks on replanting in Sabah and Indonesia, and also gradually resumes its new planting plans in Liberia, in line with the latest sustainability guidelines. For FY18, we estimate FFB growth at +6%, which is in line with the sector average of +8% for CY18.

No change in FY18-19E CNP of RM1.15-1.22b as we deem KLK’s 1Q18 results broadly in line with our estimates.

Reiterate MARKET PERFORM with higher TP of RM25.75 (from RM25.00) as we roll forward our valuation base from CY18E to average CY18-19E, for higher applied EPS of 112.5 sen (from 109.2 sen). Our applied Fwd. PER is maintained at 22.9x implying mean valuation basis. We deem this as fair as we expect to see better downstream performance for the year offsetting weaker CPO prices and an average FFB growth outlook for the company, compared to the sector. Thus, we maintain our MARKET PERFORM view on KLK, with potential catalyst should the company revive its appetite for M&A, as was demonstrated in the last two years.

Source: Kenanga Research - 13 Feb 2018