INVESTMENT HIGHLIGHTS

• 1QFY18 core earnings is within expectation

• Manufacturing division is the star performer

• Plantation division’s FFB growth should improve from 2QFY18 onwards

• Earnings estimate maintained

• Maintain BUY with TP of RM29.00

1QFY18 core earnings is within expectation. At 30% and 29% of ours and consensus earnings forecast respectively, Kuala Lumpur Kepong (KLK) 1QFY18’s Core Net Income (CNI) of RM342m (-4% yoy) met both consensus and our expectations. In our CNI calculation, we have excluded RM16m surplus, RM15m write off and RM23m forex loss. As expected, no dividend is announced in the first quarter.

Manufacturing division is the star performer. Manufacturing division’s 1QFY18 PBT surged 473%yoy to RM142m due to 8% rise in revenue and significantly higher EBIT margin of 6.1% (against 1QFY17 1.7%). The improvement in margin is caused by stabilised raw material cost (CPKO) and better economy of scale on the new plant in China. The boost in manufacturing division earnings has increased its overall PBT contribution to 33% (from 9% in FY17).

Plantation division’s FFB growth should improve from 2QFY18 onwards. Plantation division profit before tax (PBT) declined 37% yoy to RM266m in 1QFY18 due to lower CPO price (-5%yoy to RM2581 per tonne) and lower FFB production (-2% yoy to 1.02m tonnes). Despite the weak earnings in 1QFY18 for plantation division, we believe that its FFB volume should improve from 2QFY18 onwards as its Dec-2017 FFB volume has shown a small growth of 1% yoy (from the low of 5% decline yoy in Oct-2017).

Earnings estimate maintained. We maintain our CNI forecasts of RM1.15b and RM1.18b for FY18 and FY19 respectively.

Maintain BUY with TP of RM29.00. Our TP is based on Forward PE of 26.8x (+1.0SD Valuation). Maintain BUY on KLK for its earnings resiliency and decent dividend yield of 2.5%.

Source: MIDF Research - 13 Feb 2018