Kuala Lumpur Kepong (KLK)’s  1QFY14  profit was in line with  our and consensus  expectations.  We  expect  to  see  stronger  earnings  in  the next  few  quarters,  driven  by  rising  CPO  prices.  While  KLK  remains  a solid, well-focused plantation company that we like, its valuations  are a tad  rich.  We  tweak  our  SOP-based  valuation  lower  to MYR23.95  (from MYR24.40). Maintain NEUTRAL.

• In  line.  KLK’s  1QFY14  profit  was  in  line  with  our  and  consensus expectations,  at  25-27%  of  FY14  forecasts.  Although  KLK  typically achieves  about  30%  of  its  full-year  earnings in  1Q  of  the year,  due  to seasonalities,  we  expect  to  see  stronger  earnings  in  the  next  few quarters, driven by rising CPO prices.
• 1QFY14 core net profit grew  14.4% y-o-y  on the back of  a 7.5% y-o-y rise  in  revenue.  This  was  mainly  due  to  improved  profitability  at  the manufacturing division, which saw  a whopping 65% y-o-y surge  in EBIT, buoyed  by  increased  sales  volume  of  its  fatty  acids  products  and improved margins of 2.9ppts. The stronger showing at the manufacturing division was offset by weaker profit at the plantation division, weighed by a 4.3% y-o-y decline in CPO prices  and  a  3.3% y-o-y  drop in  fresh fruit bunches (FFB) production.
• We  tweak  our  forecasts  slightly  by  -0.9-1.7%  for  FY14-15,  while maintaining  our  CPO  price  assumptions  for  FY14  and  FY15  at MYR2,650/tonne  and  MYR2,850/tonne,  respectively.  We  highlight  that although  KLK’s  1QFY14  average  CPO  price  of  MYR2,291/tonne  is 13.5%  below  our  projected  MYR2,650/tonne  for  FY14,  we  believe  our forecasts  are  achievable,  given  the  current  CPO  price  of MYR2,707/tonne.
• Maintain NEUTRAL. While KLK remains a solid, well-focused plantation company  that  we  like,  with  good  growth  prospects  from  its  new downstream facilities – which came onstream in CY13 – and higher CPO prices, we deem its valuations a bit rich. Post-earnings revision and after updating KLK’s latest net debt, we tweak our SOP-based valuation lower to MYR23.95 (from MYR24.40). Maintain NEUTRAL.

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Company Profile
Kuala Lumpur Kepong (KLK) is an integrated plantations company with palm oil plantations landbank in Malaysia, Indonesia and Papua New Guinea. It  also operates in the downstream manufacturing segment through its edible oil refineries and oleochemical businesses. In addition, KLK is involved in the property development business.

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Source: RHB