Balancing act

• 1QFY17 earnings (excluding fair value losses) rose 29% y-o-y – slightly ahead on annualised basis

• Strong Plantations performance was partly offset by weaker-than-expected Manufacturing EBIT

• Forecasts under review; TP and HOLD call maintained for now

Highlights

1QFY17 (FYE September) core earnings expanded 29%

Kuala Lumpur Kepong (KLK) reported 1QFY17 net profit of RM361m (-55% y-o-y; -4% q-o-q). Excluding extraordinary items and fair value gains/losses, 1QFY17 core earnings came in at RM390m (+29% y-o-y; -14% q-o-q) – slightly ahead of our expectations on annualised basis. This was primarily driven by jumps in ASPs of crude palm oil (CPO) and palm kernel (PK). However, the strong Plantations performance was dragged by poor results from the Manufacturing segment.

Sluggish demand, high raw material costs hit Manufacturing

KLK’s 1QFY17 Plantations segment’s EBIT expanded 59% yo-y (+90% q-o-q) on seasonally higher FFB production – in addition to higher ASP in CPO (+38% y-o-y; +9% q-o-q) and PK (+84% y-o-y; +12% q-o-q) – partly offset by higher CPO production cost. The Manufacturing segment reported a 71% y-o-y drop in 1QFY17 EBIT to RM39m (including RM29m unrealised loss from outstanding derivative contracts); as the group reported lower processing margins due to surge in cost of crude palm kernel oil (CPKO); while demand remained sluggish. The Property segment’s EBIT surged to RM16m (from a low base of RM0.1m in 1QFY16) backed by higher revenue recognition.

Balance sheet remains strong

As at end December 2016, KLK’s net debt to total equity was 23.0%, relatively flat from 22.5% in September 2016. The rolling 4-quarter cash conversion cycle had expanded slightly to 60 days from 51 days in the previous quarter, mainly due to longer inventory days.

Outlook

FY17F/18F earnings under review

We are reviewing our FY17F/18F earnings to impute revisions in exchange rate forecasts; CPO and PK ASP; as well as weaker-than-expected Manufacturing margins. No change to our numbers for now.

Valuation and recommendation

Pending revisions, we maintain our HOLD call and TP of RM22.50 on the counter.

Source: Alliance Research - 15 Feb 2017