INVESTMENT HIGHLIGHTS

• KLK’s 1QFY19 normalised earnings failed to keep pace with our and consensus expectations

• Both the plantations and manufacturing segments underperformed

• Improvement in FFB production insufficient to make up for the fall in CPO and PK price

• Financial performance of the downstream segment impacted by the group’s oversea operation in China and Europe

• Maintain NEUTRAL with a revised TP of RM22.39

1QFY19 earnings lower than expected. Kuala Lumpur Kepong Bhd (KLK) 1QFY19 normalised earnings amounted to RM190.4m, a decline of -37.2%yoy. Lower earning was seen from the plantation and manufacturing segments. This, however, was partially buffered by higher contribution from the property development and farming segments. All in, the group’s 1QFY19 financial performance came in below ours and consensus’ expectations, accounting for 17.5% and 19.5% of full year FY19 earnings estimates respectively.

Plantations. The plantations segments registered profit of RM127.5m. This represents a drop of -58.0%yoy as compared to 1QFY18 profit of RM303.6m. This was mainly impacted by lower CPO and PK prices of RM1,840/mt (-28.7%yoy) and RM1,375/mt (-44.7%yoy) respectively. Fortunately, FFB production improved by +7.9%yoy to 1.1mmt.

Manufacturing. The segment profit dropped by -28.8%yoy to RM98.0m as a result of decrease in selling prices. Decline in profits from China and Europe operations had more than offset the improvement in profit from Malaysia operations.

Property Development. The property segment registered a +542.6%yoy improvement in profit to RM11.1m. This was mainly supported by higher revenue of RM39.8m (+122.3%yoy).

Impact on earnings. Premised on weaker-than-expected performance from the plantations and manufacturing segments, we are revising our FY19 and FY20 earnings downwards to RM912.2m and RM1,060.3m respectively.

Target Price. We are rolling forward our valuation base year to FY20 and derive a new target price of RM22.39. This is achieved by pegging revised FY20 EPS of 93.3 to target PER of 24.0x based on +0.5 standard deviation valuation.

Maintain NEUTRAL. The weak CPO and PK prices environment has negatively impacted the revenue generating capability of the group. Fortunately, KLK registered an improvement in FFB production though it is insufficient to offset the fall in the commodity prices. Moving forward, as we do not expect much improvement in both CPO and PK price, we expect the future performance of the plantation division to remain under pressure. There is also profit pressure from the group’s oversea downstream segment, i.e. China and Europe. On another note, there is an uptick in the profit of the property development. However, the segment’s contribution to the group is minute. Given the lack of rerating catalyst, we are maintaining our NEUTRAL recommendation at this juncture.

Source: MIDF Research - 19 Feb 2019