INVESTMENT HIGHLIGHTS

• KLK’s 1HFY19 normalised earnings failed to keep pace with our and consensus expectations

• Both the plantations and manufacturing segments continues to underperformed, primarily due to lower selling price

• Expecting both FY19 and FY20 dividend to remain stagnant at 45sen

• Downgrade to SELL with a revised TP of RM18.77

Poor financial performance. Kuala Lumpur Kepong Bhd (KLK) 2QFY19 normalised earnings amounted to RM133.3m, a decline of - 19.7%yoy. Lower earning was seen from the plantation (-55.8%yoy) and manufacturing (-18.5%yoy) segments. The weaker 1QFY19 financial performance contributed to a -38.6%yoy decline in 1HFY19 normalised earnings of RM288.0m. All in, the group’s 1HFY19 financial performance came in below ours and consensus’ expectations, accounting for merely 33.4% and 31.4% of full year FY19 earnings estimates respectively.

Plantations. The plantations segments registered 1HFY19 profit of RM100.9m. This represents a drop of -57.1%yoy as compared to 1QFY18 profit of RM532.0m. This was mainly impacted by lower CPO and PK prices of RM1,906/mt (-23.4%yoy) and RM1,340/mt (- 41.2%yoy) respectively. Fortunately, FFB production improved by +5.6%yoy to 2.0m/mt.

Manufacturing. The segment 1HFY19 profit dropped by -24.1%yoy to RM191.3m. This is in-line with reduction in revenue to RM4.5b (- 13.5%yoy), especially from the European segment, in view of lower selling price.

Property Development. The property segment registered a +119.0%yoy improvement in profit to RM18.2m. This was mainly supported by higher revenue of RM74.6m (+34.2%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 RM667.7m (-22.5%) and RM832.6m (-16.2%) respectively. This is mainly to reflect the lower CPO and CPKO price assumptions.

Source: MIDF Research - 16 May 2019