• 1QFY17 core earnings within expectation

• Plantation division surged 90% qoq and 59% yoy

• Manufacturing division outlook is challenging but its profit contribution is much smaller than plantation

• Maintain BUY with TP of RM29.25

1QFY17 core earnings within expectation. At 30% of consensus and 31% of our forecast, Kuala Lumpur Kepong (KLK) 1QFY17’s Core Net Income (CNI) of RM356m was within expectation as we expect the high CPO price in 1QFY17 to normalize in the remaining quarters. In our CNI calculation, we have excluded RM27m forex gain, RM9m write off and RM2m from other one off items. As expected, no dividend is announced in the 1Q in line with historical practice.

Plantation division profit surged 90% qoq and 59% yoy. Plantation division operating profit surged 90% qoq to RM422m in the 1QFY17 due to higher CPO price (+9%qoq to RM2720/MT) and better FFB production (+16% qoq to 1.045m MT). Against the same quarter last year, operating profit jumped 59% as better CPO price (+38%yoy) more than offset the marginal decline in FFB volume (-1%yoy). Plantation division is the biggest earnings contributor for KLK with operating profit of RM827m (or 64% of the Group’s) in FY16.

Manufacturing division outlook is challenging but its profit contribution is much smaller than plantation. Manufacturing division’s profit declined 71%yoy to RM39m as margin narrowed to 1.7% in 1QFY17 (against 1QFY16’s 7.5%). This is mainly caused by high raw material price which is Crude Palm Kernel Oil (CPKO). Compared to last quarter, improvement is seen as 1QFY17 operating profit of RM39m is much higher than 4QFY16’s RM6m. The outlook for manufacturing division is challenging but we are not overly concerned as manufacturing division earnings contribution is less significant than plantation with operating profit of RM371m (or 29% of the Group’s) in FY16.

Maintain BUY with TP of RM29.25. Our earnings estimate for FY17 and FY18 are unchanged. The Target Price is based on unchanged Forward PE of 26.8x (+1.0SD Valuation) on FY17 EPS forecast of 109.2 sen. Maintain BUY as KLK is expected to benefit significantly from high CPO price as 64% of earnings contribution came from upstream plantation division.

Source: MIDF Research - 15 Feb 2017