KLK’s FY19 CNP* of RM610m (-22% YoY) came in slightly below our (94%) and consensus (93%) estimates due to lower than-expected CPO prices. FFB production of 4.10m MT (+4% YoY) was spot on our estimate. Tweak FY20E CNP lower by 0.9% on housekeeping and introduce FY21E CNP of RM988m. Maintain OUTPERFORM with an unchanged TP of RM24.60. At current price, KLK is trading an unjustified Fwd. PBV of 2.2x (vs. large cap peers’ 2.5x), implying -2.0SD from mean.

FY19 slightly misses. Kuala Lumpur Kepong Berhad (KLK)’s 4QFY19 core net profit* (CNP) came in at RM146m (-7% YoY; -6% QoQ), bringing FY19 CNP to RM610m (-22% YoY), below our/consensus’ estimates at 94%/93%, respectively, mainly due to lower-than expected CPO prices (FY19: RM1,924/MT vs. expected RM2,000/MT). FFB production of 4.10m MT (+4% YoY) was spot on with our 4.10m MT estimate. A final dividend for FY19 will be announced at a later date and we expect KLK to announce a 25.0 sen final dividend, bringing FY19 dividend to 40.0 sen (-11% YoY).

Dragged by low CPO prices. YoY, despite 4% FFB growth, FY19 CNP fell 22% stemming from 18%/38% plunge in the average CPO/PK prices. The decline was partially cushioned by an improvement in downstream margin (+0.6 ppt) due to lower feedstock prices. Similarly,

QoQ, despite a 10% increase in FFB output, 4QFY19 CNP fell 6% due to: (i) 3%/1% decline in average CPO/PK prices, and (ii) 4% decline in downstream profits largely owing to lower sales volume.

Better days ahead. We are unperturbed by KLK’s earnings miss as we expect significant earnings improvement in subsequent quarter premised on higher average CPO prices (QTD1QFY20: +12% QoQ). Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks. Meanwhile, 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.

Tweak FY20E CNP by 0.9% to RM902m (from RM910m) on housekeeping and introduce FY21E CNP of RM988m.

Maintain OUTPERFORM with an unchanged TP of RM24.60 based on CY20E PBV of 2.4x, reflecting mean valuation. At current price, KLK is only trading at Fwd. PBV of 2.2x (vs. large cap peers’ 2.5x), implying -2.0SD from mean which we believe is unjustified given its: (i) above-average FFB growth (for big caps) of 4.3%, (ii) above-sector average FY20 ROE of c.8% (vs. sector’s average of c.5%), and (ii) decent dividend yield of 2%. We believe that any weakness in share price from the slight earnings miss is an opportunity to collect.

Risks to our call are sharp decline in CPO prices and significant increase in fertiliser/transportation costs.

Source: Kenanga Research - 20 Nov 2019