Kuala Lumpur Kepong Berhad (KLK) recorded 2Q18 Core Net Profit* (CNP) of RM532m, coming in within both consensus and our forecast at 45% and 46%, respectively. An interim dividend of 15.0 sen was announced, as expected. No change to our FY18-19E CNP of RM1.15-1.22b. Reiterate MARKET PERFORM with unchanged TP of RM25.75 based on Fwd. PER of 22.9x.

1H18 within expectations. 1H18 CNP at RM532m came in within expectations, at 45% of consensus’s forecasted RM1.17b and 46% of our estimated RM1.15b. FFB production at 1.98m metric tons (MT) was in line, at 48% of our forecast. An interim dividend of 15.0 sen was announced, in line with historical payout patterns of 15.0 sen in 1H. We expect the remainder to be paid in 4Q.

Downstream recovery. YOY, CNP softened 20% largely on lower prices, which led to upstream segment core operating profit decline of 30% to RM521m. Marginal FFB production improvement of +2% failed to offset both lower CPO prices (-13%) and PK prices (-21%). On the other hand, the decline in input cost, particularly PK, led to downstream core profit doubling to RM233m. QoQ, CNP fell 50% on weaker performance in both segments. Upstream core earnings declined 27% to RM220m on seasonal FFB production decline (-7%) compounded by lower CPO (-7%) and PK (-17%) prices. Meanwhile, downstream core profit softened 19% to RM105m on lower prices of its end product, particularly in China.

Upstream weakness offset by downstream improvement. Management expects CPO prices to remain at the current level (c.RM2,400/MT; in line with our forecast), which would lead to lower plantation profits. However, oleochemical businesses have improved on utilization and efficiency, which should help offset margin pressure on price fluctuations. We expect earnings growth to remain consistent over the longer term in view of stable organic and inorganic expansion tracks, including its ongoing plans to establish a new refinery in Indonesia and its bolt-on acquisitions in both upstream and downstream business segments. 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 2Q18 results are in line with our forecasts.

Maintain MARKET PERFORM with unchanged TP of RM25.75 based on Fwd. PER of 22.9x applied to average of CY18-19E EPS of 112.5 sen. Our applied Fwd. PER is unchanged 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. Our MARKET PERFORM view is unchanged, although long- term earnings growth prospects remain positive in view of management’s steady expansion strategy.

Source: Kenanga Research - 17 May 2018