INVESTMENT HIGHLIGHTS

• 1HFY17 core earnings within expectation

• Plantation division profit doubled yoy

• Manufacturing division profit declined but its profit contribution is smaller than plantation

• Maintain BUY with TP of RM29.25

1HFY17 core earnings within expectation. At 57% of consensus and 55% of our forecast, Kuala Lumpur Kepong (KLK) 1HFY17’s Core Net Income (CNI) of RM667m was within expectation as we expect CPO price to normalize in 2HFY17. In our CNI calculation, we have excluded

RM5m forex loss, RM15m write off and RM3m from other one off items. As expected, a 15.0 sen dividend is announced (ex-date: 13-July).

Plantation division profit doubled yoy. Plantation division operating profit surged 100% yoy to RM786m in the 1HFY17 due to higher CPO price (+37%yoy to RM2851/MT) and better FFB production (+7% yoy to 1.95m MT). Plantation division is the biggest earnings contributor for KLK with operating profit of RM827m (or 64% of the Group’s) in FY16.

Manufacturing division profit declined but its profit contribution is smaller than plantation. Manufacturing division’s operating profit declined 56%yoy to RM106m as margin narrowed to 2.1% in 1HFY17 (against 1HFY16’s 6.7%). This is mainly caused by high raw material price which is Crude Palm Kernel Oil (CPKO). We gather that the outlook is still challenging but recovery is expected in the oleochemical due to favourable raw material prices.

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 - 23 May 2017