INVESTMENT HIGHLIGHTS

• FY17 core earnings is slightly below expectation

• Plantation division is the star performer

• Manufacturing division earnings declined but its contribution is small

• Earnings estimate reduced

• Maintain BUY with lower TP of RM29.00

FY17 core earnings is slightly below expectation. At 97% and 92% of consensus and ours earnings forecast respectively, Kuala Lumpur Kepong (KLK) FY17’s Core Net Income (CNI) of RM1.08b met consensus expectation but was slightly below our estimate. The negative deviation is caused by weaker than expected margin in the manufacturing division due to high CPKO prices. In our CNI calculation, we have excluded RM22m surplus, RM30m write off, RM64m impairments and RM4m forex loss. A final dividend of 35.0 sen (Ex-date: 19-Feb-2018) is announced and this is within expectation.

Plantation division is the star performer. Plantation division profit before tax (PBT) surged 56% yoy to RM1.29b in FY17 due to higher CPO price (+20%yoy to RM2735 per tonne) and better FFB production (+11% yoy to 3.87m tonnes). Plantation division contributed 85% of KLK’s PBT for FY17.

Manufacturing division earnings declined but its contribution is small. Manufacturing division’s PBT declined 59%yoy to RM134m due to high cost of raw materials (particularly CPKO). Manufacturing division contributed 9% of KLK’s PBT for FY17.

Earnings estimate reduced. We have lowered our FY18 CNI by 12% to RM1.15b after assuming lower margin in the manufacturing division. We have also introduced our FY19 CNI forecast of RM1.18b.

Maintain BUY with lower TP of RM29.00. We have rollover our valuation to FY18. The Forward PE applied is unchanged at 26.8x (+1.0SD Valuation). Maintain BUY on KLK as we expect the Company to benefit significantly from high CPO price as 85% of their earnings is from plantation division.

Source: MIDF Research - 23 Nov 2017