KEY INVESTMENT HIGHLIGHTS

• Lower CPO price and higher production cost lead to -12.2%yoy declined in 4QFY19 normalised earnings

• Full year FY19 normalised earnings amounted to RM596.1m (-25.0%yoy), weaker than ours and consensus expectations

• Operation in Eupore registered lower contribution in view of profit margin erosion

• No announcement on final dividend yet

• Maintain SELL with an unchanged TP of RM18.78

Another weak quarter. Kuala Lumpur Kepong Bhd (KLK) 4QFY19 normalised earnings amounted to RM146.1m, a decline of -12.2%yoy. Note that bulk of the exceptional items pertained to surplus on government acquisition of land amounting to RM42.5m. The decline in the normalised earnings was mainly attributable to the fall in CPO and PK selling prices and increase in cost of CPO production.

Fail to keep pace with expectations. Cumulatively, full year FY19 normalised earnings declined by -25.0%yoy to RM591.6m. This came in below ours and consensus expectations, accounting for 89.3% and 90.5% full year FY19 earnings estimates respectively.

Plantations. The segment’s profit reduced by -52.2%yoy to RM394.6m. This was mainly caused by lower CPO and KP price of RM1,924 (- 17.6%yoy) and RM1,210 (-38.5%yoy) respectively as well as higher CPO production cost. Fortunately, the decline was partially supported by higher FFB production of 4.5%yoy to 4.1m mt and positive contribution from processing and trading operations.

Manufacturing. The manufacturing FY19 profit came in marginally higher (+1.2%yoy) to RM385.6m despite a -13.5%yoy contraction in revenue to RM8.8b. The stable earnings performance mainly stemmed from stronger performance from the Malaysian and China operations through favourable margins and better sales volume which offset the weaker results from Europe.

Property development. Profit from the segment advanced by +25.2%yoy to RM27.5m. This was in view of higher recognition of profit from projects with higher margins.

Impact to earnings. Despite weaker-than-expected earnings, we are mainlining FY20 earnings forecasts at this juncture in view of the improvement seen in commodity prices as well as the cessation of its operation in Sinoe County, Liberia.

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. Moreover, the group also incurred higher CPO production cost. 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 Europe. While the group managed to uphold the contribution from the oleochemical division and property segment, they are unable to make up for the weak earnings from the plantation segment. All factors considered, we are maintaining our SELL recommendation on the stock

Source: MIDF Research - 20 Nov 2019