INVESTMENT HIGHLIGHTS

• 9MFY18 core earnings below expectation

• Manufacturing division performed well

• Plantation division profit is affected by low CPO price

• FY18 earnings estimate reduced

• Maintain BUY with lower TP of RM27.38

9MFY18 core earnings below expectation. At 61% and 59% of consensus and our earnings forecasts respectively, Kuala Lumpur Kepong (KLK) 9MFY18’s Core Net Income (CNI) of RM654m (-23%yoy) missed both consensus and our expectations. Key negative surprise is the negative contribution from processing and trading operations. In 3QFY18, KLK incurred RM45m loss on derivatives.

In our CNI calculation, we have excluded RM28m surplus, RM23m net write off and RM7m net forex loss. As expected, no dividend is announced in the 3rd quarter.

Manufacturing division performed well. Manufacturing division’s 9MFY18 PBT surged 501%yoy to RM336m due to 4% rise in revenue and higher EBIT margin of 4.9% (against 9MFY17’s 1.4%). The improvement in margin is caused by lower material cost (CPKO).

Plantation division profit is affected by low CPO price. Plantation division profit before tax (PBT) declined 43%yoy to RM574m in 9MFY18 due to lower CPO price (-13%yoy to RM2428 per tonne) which more than offset 1% improvement in FFB production.

FY18 earnings estimate reduced. We have reduced our FY18 CNI forecast by 22% to RM864m to account for the negative contribution from processing and trading operations. However, we maintain our FY19 CNI forecast of RM1.09b as we do not expect the negative contribution to continue in FY19.

Maintain BUY with lower TP of RM27.38. Our TP is based on Forward PE of 26.8x (+1.0SD Valuation). We have rollover our valuation to FY19. Maintain BUY on KLK for its earnings resiliency and decent dividend yield.

Source: MIDF Research - 15 Aug 2018