KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings declined to RM160.7m, impacted by the property segment and investment holdings

• 9MFY20 normalised earnings of RM547.4m (+17.8%yoy), mainly supported by the upstream segment

• 9MFY20 financial performance came in within ours but below consensus expectations

• The manufacturing, property and investment holdings segments will continue to drag the group’s earnings

• Maintain Neutral with an unchanged TP of RM20.19

Lower normalised earnings. Kuala Lumpur Kepong Bhd’s (KLK) 3QFY20 normalised earnings came in at RM160.7m (-8.9%yoy). The decline of –RM15.8m was mainly attributable to lower contribution from the property segment at RM6.9m (-36.8%yoy) and loss from the investment holdings of –RM22.6m.

Within expectation. Cumulatively, 9MFY20 earnings estimates amounted to RM547.4m (+17.8%yoy). This came in within ours but below consensus expectations, accounting for 72.6% and 69.0% of full year FY20 earnings estimates respectively.

Plantations. 1HFY20 segment profit improved by +98.6%yoy to RM532.7m. This was mainly attributable to favourable CPO price (9MFY20: RM2,328/mt vs 1HFY19: RM1,925/mt) as well as improved profits from processing and trading operations. Note that FFB production declined by -5.5%yoy to 2.9m mt.

Manufacturing. The manufacturing segment 9MFY20 profit contracted by -2.0%yoy to RM284.4m which mainly stemmed from the oleochemical division. This in tandem with the decline in revenue to RM3.9b (-13.1%yoy), owing to lower sales volume.

Property development. The property segment’s profit reduced by - 116.3%yoy to RM 24.5m. This is premised on lower revenue of RM84.3m (-30.3%yoy).

Impact to earnings. No change to our earnings estimate at this juncture.

Target Price. We are keeping our target price of RM20.19. This is premised on pegging FY21EPS of 75.6sen against forward PER of 26.7x. Our target PER is the group’s one standard deviation above the two-year historical average.

Maintain NEUTRAL. The strong recovery in CPO price from October 2019 onwards has bode well for the group. However, we are concern on the contraction in FFB production. While there production is expected to improve seasonally, it could still come lower in comparison with the previous year. This would potentially limit future earnings upside. Meanwhile, we expect the performance of the oleochemical segment to remain resilient, supported by its Malaysian and Chinese operations. We also observe there has been earnings weakness stemming from the property segment. We expect the segment’s performance would continue to be depressed in the foreseeable term. On another note, consistent dividend payout, which provides a yield of approximately two percent, would further entice investor to remain vested in the stock. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 21 Aug 2020