Kuala Lumpur Kepong Berhad (KLK)’s 1Q19 CNP* of RM195m is broadly within our forecast at 17% and consensus estimate at 20%. YoY, 1Q19 CNP plummeted 41% as CPO prices weakened 29% and on poorer Oleochemical performance amid stiffer competition, but cushioned by an 8% FFB growth. QoQ, 4Q18 CNP was up 24% as Oleochemical profit nearly tripled on cheaper feedstock. No dividend, as expected. No changes in FY19-20E CNPs of RM1.15-1.20b. Maintain MARKET PERFORM with an unchanged TP of RM25.70.

Broadly within expectations. KLK’s 1Q19 core net profit* (CNP) of RM195m came in broadly within our forecast at 17% and consensus estimate at 20%. We have stripped out a surplus on government acquisition of land of RM22.5m, a foreign exchange gain of RM33.3m and a surplus on land disposal of RM0.4m in our CNP calculation. While 1Q had normally been a strong season averaging 29% of full- year earnings in the past five years, 1Q19 is likely to be an exception due to unconventionally low CPO prices. Hence, we expect earnings in subsequent quarters to pick up on a sharp CPO price recovery. FFB production of 1.11m MT is within our expectation, accounting for 27% of our 4.11m MT estimate. No dividend was announced, as expected.

Weaker CPO price – the culprit. YoY, 1Q19 CNP plummeted 41% mainly due to lower operating profit in the Plantation segment (-58% to RM127m) amid a 29% drop in average CPO price to RM1,840/MT and a 45% plunge in PK prices. This was partially mitigated by an 8% increase in FFB production. Despite cheaper feedstock, Oleochemical profit also fell, by 31%, as margins waned amid stiff competition from Indonesia and a sharp drop in crude oil prices, which made the group’s Methyl Ester-based products less attractive. QoQ, 1Q19 CNP was up 24% as Oleochemical profit nearly tripled on lower input costs. On the other hand, despite 8% FFB growth, Plantation profit dropped 25% on an 11% decline in CPO prices.

Earnings to improve on higher volumes. Moving forward, we believe earnings would recover on rising CPO prices and higher FFB output (FY19E: +5%). In addition, PK at current price levels is favourable to downstream margins. Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks. The group continues to be on the lookout for acquisitions in the upstream segment, with preference for brownfield oil palm plantations with flat/low-lying land.

No changes in FY19-20E CNPs of RM1.15-1.20b as earnings were in line with expectations.

Maintain MARKET PERFORM with an unchanged TP of RM25.70 pegged to 23.5x CY19E EPS of 109.2 sen. Our Fwd. PER of 23.5x (- 2.0 SD) reflects its CY19E FFB growth prospects of 5% as well as its large-cap and FBMKLCI inclusion statuses. While KLK’s long-term prospects remain positive as management continues its hunt for M&A targets, we do not see any excitement in the near-term given its average production outlook and the competitive environment in the Oleochemical segment.

Risks to our call are sharp falls/rises in CPO prices and a precipitous rise/drop in labour/fertiliser/transportation costs.

Source: Kenanga Research - 19 Feb 2019