Kuala  Lumpur  Kepong  (KLK)’s 9MFY13  earnings  fell  below  our  and consensus  expectations,  due  to  lower  CPO  price  assumptions  and higher  production  costs  in  3QFY13.  Although  it  remains  a  solid,  well-focused plantation company that we like, valuations are too rich, in our opinion. We lower our FY13 forecast but leave FY14 estimates relatively unchanged. Maintain NEUTRAL with the FV trimmed to MYR21.00. 
 
- Below  expectations.  KLK’s 9MFY13  profit  was  below  expectations, coming  in  at  63%  of  our  and  59%  of  consensus  FY13  forecasts respectively,  versus  a  normal  70-75%.  The  shortfall  was  mainly  due  to the  lower  crude  palm  oil  (CPO)  price  of  MYR2,268/tonne  (vs  our MYR2,400  projection)  as  well  as  higher  production  costs  in  3QFY13 (estimated  at  +10-15%  q-o-q).  We  highlight  that  every  MYR100/tonne change in CPO price would affect KLK’s earnings by 4-6%.  

- Core  net  profit  fell  20%  y-o-y  on  the  back  of  a  17%  y-o-y  drop  in revenue  in  9MFY13.  The  decline  was  mainly  caused  by  the  20%  y-o-y drop  in  CPO  price  to  MYR2,268/tonne,  offset  by  higher  FFB  production (+14% y-o-y). The manufacturing division also recorded lower revenue of 10%  y-o-y  in  9MFY13,  but  margins  improved  by  2.8  ppts  due  to  the lower  raw  material  prices  and  a  turnaround  to  profitability  at  its  China operations.  Earnings  from  its property  division  surged  81% y-o-y  during the  period,  as  more  profits  were  recognised  from  recent  launches  at its sole Bandar Seri Coalfields project in Sungai Buloh.  

- Forecast  revised  down  for  FY13.  We  trim  our  forecast  by  13.5%  for FY13, but leave our FY14F numbers relatively unchanged, after imputing higher production costs. 

- Maintain  NEUTRAL,  with  a  lower  FV.  KLK  remains  a  solid,  well-focused  plantation  company  that  we  like,  but  valuations  are  too  rich,  in our  opinion.  The  company’s  existing  and  soon-to-be  expanded downstream facilities  that are expected to come on-stream sometime in CY13 would help mitigate the effect of lower CPO prices on its upstream business.  Post-earnings  revision  and  updating  of  KLK’s latest net debt, our  SOP-based  valuation  has  been  lowered  to  MYR21.00  (from MYR21.30). We make no change to our NEUTRAL recommendation.

Source: RHB