INVESTMENT HIGHLIGHTS

• KLK’s 9MFY19 normalised earnings of RM515.1m (-21.2%yoy) came in within our expectation

• 9MFY19 earnings from plantation division more than halves on weak selling price of CPO (-20.7%) and PK (-39.7%yoy)

• Cessation of estate operation in Liberia in view of limited arable area

• Maintain SELL with an unchanged TP of RM18.78

Cessation of operation in Liberia. Kuala Lumpur Kepong Bhd (KLK) 3QFY19 normalised earnings amounted to RM177.8m, an increase of +11.4%yoy. This was mainly attributable to higher earnings contribution from the manufacturing (+16.2%yoy) and property development segments (+33.4%yoy). Note that one of the exceptional items pertained to a one-off impairment of RM145.3m with regard to the cessation of its operation in Sinoe County, Liberia. From the recent High Carbon Stock and High Conservation Value assessments, the group view that there is limited plantable area in the estate, thus making it no longer feasible to continue operations.

Within expectations. Cumulatively, 9MFY19 normalised earnings amounted to RM515.1m (-21.2%yoy). This was negatively impacted by the decline in earnings from the plantation (-59.1%yoy) and manufacturing segments (-14.0%yoy). All in, the group’s 9MFY19 financial performance came in within ours but below consensus’ expectations, accounting for 77.2% and 69.5% of full year FY19 earnings estimates respectively.

Plantations. The plantations segments registered 9MFY19 profit of RM268.2m. This represents a drop of -59.1%yoy as compared to 9MFY18 profit of RM656.1m. This was mainly impacted by lower CPO and PK prices of RM1925/mt (-20.7%yoy) and RM1,263/mt (-39.7%yoy) respectively. Fortunately, FFB production improved by +4.9%yoy to 3.1m mt.

Manufacturing. The segment 9MFY19 profit dropped by -14.0%yoy to RM290.4m. This is in-line with reduction in revenue to RM6.7b (- 12.7%yoy), especially from the European segment in view of thin operating margins.

Property Development. The property segment registered a +76.4%yoy improvement in 9MFY19 profit to RM29.3m. This was mainly supported by higher revenue of RM121.1m (+14.1%yoy).

Impact on earnings. No change to our earnings estimates at this juncture.

Target Price. We are maintaining our target price of RM18.78. This is premised on pegging FY20EPS of 78.2sen against forward PER of 24.0x. Our target PER is the group’s two year historical average PER.

Maintain SELL. The group continues to be beleaguered by the weak CPO and CPKO prices environment. This has lead to notable reduction in its revenue despite there is improvement in FFB production. We are also concern on the thinning margin from its European operation. Meanwhile, the property segment’s profit has improved considerably. However, it is relatively minute in comparison with the contribution from plantation and manufacturing divisions. All in, we are maintaining our SELL recommendation on the stock.

Source: MIDF Research - 22 Aug 2019