INVESTMENT HIGHLIGHTS

• 1HFY18 core earnings is within expectation

• Manufacturing division is the star performer

• Plantation division’s FFB growth should improve in 2HFY18

• Earnings estimate maintained

• Maintain BUY with TP of RM28.50

1HFY18 core earnings is within expectation. At 48% and 46% of ours and consensus earnings forecast respectively, Kuala Lumpur Kepong (KLK) 1HFY18’s Core Net Income (CNI) of RM540m (-19% yoy) met both consensus and our expectations. In our CNI calculation, we have excluded RM27m surplus, RM19m write off and RM38m forex loss. As expected, a 15.0 sen dividend is announced with the ex-date set on 12-July-2018.

Manufacturing division is the star performer. Manufacturing division’s 1HFY18 PBT surged 229%yoy to RM253m due to 5% rise in revenue and higher EBIT margin of 5.4% (against 1HFY17’s 2.1%). The improvement in margin is caused by lower material cost (CPKO). The boost in manufacturing division earnings has increased its overall PBT contribution to 35% (from 9% in 1HFY17).

Plantation division’s FFB growth should improve in 2HFY18. Plantation division profit before tax (PBT) declined 43% yoy to RM447m in 1HFY18 due to lower CPO price (-13%yoy to RM2487 per tonne) which more than offset 2% improvement in FFB production. We believe that its FFB volume growth should improve in 2HFY18 as April production has shown good improvement of 5.5% yoy.

Earnings estimate maintained. We maintain our CNI forecasts of RM1.13b and RM1.14b for FY18 and FY19 respectively.

Maintain BUY with TP of RM28.50. 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 - 17 May 2018