9MFY20 CNP of RM553m (+19% YoY) cameabove our(80%), but within consensus’ (69%), estimate. Deviation is due to higher-than-expected refining margin. We expect sequential improvement in 4QFY20 on higher CPO price (QTD4QFY20:+17% QoQ) and 4QFY20E FFB (+3.7% QoQ), but improvement could be partially negated by higher feedstock prices. RaiseFY20-21E CNP by 10-4% on higher refining margin (5% vs 4.0-4.6% previously). Still a MARKET PERFORM, but with higher TP of RM23.10 (from RM22.20) based on unchanged FY21E PER of 30x (- 0.5SD), given the headwinds ahead– peak production period exerting downward pressure on CPO prices.

Above expectations. KLK registered 3QFY20 core net profit* (CNP) of RM195m (+26% YoY; +9% QoQ) This brought 9MFY20 CNP to RM553m (+19% YoY), above our estimate (80%), but within consensus’ (69%). Note that we have excluded unrealized FOREX gains of RM172.2m among others to arrive at our 3QFY20 CNP. The positive deviation is due to higher-than-expected refining margin of 5.3% (vs. our expected 4.0%). 9MFY20 FFB output (-6% YoY) at 2.88m MT (73% of full-year estimate) and absence of DPS for the quarter, were as expected.

Lifted by upstream. YoY, 9MFY20 CNP rose (+19%) mainly driven by upstream as plantation segmental profit rose (+100%) on higher CPO/PK prices (+21%/+8%) which outstripped lower FFB output (-6%). QoQ, despite lower CPO price (-13%), 3QFY20 CNP improved (+9%) as: (i) plantation segmental profit leapt (35%) on higher FFB output (+14%), and (ii) downstream segmental profit rose (+9%) on lower feedstock prices.

Expecting a sequential improvement in 4QFY20. Given that: (i) QTD4QFY20 CPO price has increased (+17% QoQ), and (ii) our expectations of higher (+3.7% QoQ) 4QFY20 FFB output of 1.05m MT, we believe 4QFY20 could see a sequential improvement in earnings. The improvement, however, could be partially neutralized by the impact of higher feedstock prices on its downstream division. Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks. Having said that, we caution that CPO price is still expected to come under pressure in the near-term as we enter peak production season.

Raise FY20-21E CNP by 10-4% on higher FY20-21E refining margin of 5% each (from 4.0-4.6%).

Still a MARKET PERFORM, but with higher TP of RM23.10 (from RM22.20) based on unchanged FY21E PER of 30x (in-line with large cap peers’ average), reflecting -0.5SD valuation. At current price, KLK is trading at FY21E PER of 29.3x, fairly valued in our opinion - as we anticipate CPO prices to come under pressure as production rises in the coming months. Upside is limited at this juncture and we believe a MARKET PERFORM call is appropriate.

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

Source: Kenanga Research - 21 Aug 2020