1QFY21CNPof RM275.4mcameaboveour(30%), butwithinconsensus’ (27%), estimate. We expect 2QFY21 earnings to grow sequentiallyon higher CPO price (QTD2QFY21: +13% QoQ). Delay in completion of estate acquisitionsled us toreduce FY21-22E FFB growth to 7-8% (from 12-4%), but raise FY21-22E earnings estimate by 10-15% as higher CPO price overshadows lower FFB growth. Reiterate OUTPERFORM with higher TP of RM26.80, on lower FY21E PERof 28x (-0.5SD). Still one of our preferredpicks-attractive at current price (FY21E PER of 23.8x;close to -1.50SD).

Above expectations. KLK registered 1QFY21 core net profit* (CNP) of RM275.4m (+54% YoY; +40% QoQ), which is above our estimate (30%), but within consensus’ (27%) due to higher-than-expected CPO price overshadowing lower-than-expected 1QFY21 FFB output of 974k MT (flat YoY) – accounting for 22% of our full-year estimate. The absence of dividend is as expected.

Propelled by upstream. YoY, 1QFY21 CNP rose (+54%) driven by: (i) higher plantation segmental profit (+75%) on higher CPO/PK prices (+22%/+38%), and (ii) manufacturing segmental profit (+58%) which we believe is due to higher sales volume and price in China and Europe. QoQ, despite lower FFB output (-7%), plantation segmental profit rose (+43%) attributable to higher CPO/PK prices (+13%/+23%).

Upstream to still drive earnings in 2QFY21. QTD in 2QFY21 CPO price has increased (+13% QoQ). Building on this, we expect to see sequential earnings improvement in 2QFY21, despite potentially lower (seasonal) FFB output. To date, we understand the group has not completed its acquisition of: (i) FB & TSS estates (initially expected by 1QCY21), and (ii) PWS estates (initially expected by 3QCY20) – leading us to adopt a more conservative view with regards to the timeline for completion. We now expect the acquisitions to be completed by 2QCY21, which will be reflected in our FFB estimates below.

Raise FY21-22E earnings estimate by 10-15% on higher FY21-22E realized CPO price of c.RM2,750-2,780, while we reduce FY21-22E FFB growth to 7-8% (vs. 12-4% previously).

Reiterate OUTPERFORM with a higher TP of RM26.80 (from RM26.00), but based on a lower FY21E PER of 28x (from 30x), reflecting -0.5SD valuation. KLK is presently traded at an attractive FY21E PER 23.8x (close to -1.5SD from mean). This is despite its: (i) c.36% earnings growth in FY21E, (ii) decent FY21E FFB growth of 7%, as well as (iii) its integrated operations and FBMKLCI status. Since late-December 2020, share price has declined c.10%, presenting an attractive entry point for keen investors.

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

Source: Kenanga Research - 18 Feb 2021