1QFY15 (Sep) was below expectations, due to weak FFB production and manufacturing  profits.  Downgrade  to  SELL,  with  new  MYR19.70  TP (15%  downside).  We  believe  KLK’s  extensive  expansion  into  the Indonesian refinery space may take some  time to yield strong returns, as it ramps up its operations, while recovery of the fatty alcohols and surfactant margins very much depends on crude oil prices.

Below  expectations.  Kuala Lumpur Kepong’s  (KLK)  1QFY15  core net profit was  below  our  and consensus  expectations, coming in at  18-19% of  FY15  forecasts.  The main  differences  were  the  lower-than-expected FFB production, which fell 5%  YoY  in 1QFY15 (vs  our FY15 forecast of +4.8%  YoY,  as  well  as  lower  CPO  price  achieved  of  MYR2,138/tonne (vs  our  MYR2,475/tonne  projection)  and  weaker-than-expecteddownstream  contributions,  as  KLK’s  fatty  alcohol  and  surfactant businesses suffered negative margins.  

Weak plantations and manufacturing divisions.  KLK’s  1QFY15  core net  profit  fell  32%  YoY  despite  a  24.9%  YoY  rise  in  revenue.  The increased  revenue  came  from  new  contributions  from  its  Indonesianrefinery  (which started operations in Nov  2014)  although this was  offset by lower CPO prices  (-6.7% YoY) and lower FFB production (-5% YoY). Profitability declined due to weaker EBIT margins in both the plantations and  manufacturing  divisions,  due  to  lower  CPO  prices  and  negative margins incurred at its oleochemicals unit.

Forecasts.  All in, we have adjusted our FY15 earnings downwards by 11%, taking into account  lower FFB production of 0.2% for FY15 (from +5%),  followed  by  relatively  unchanged  growth  projections  of  3-4%  for FY16-17;  as  well  as  weaker  margins  at  the  downstream  division.  Our FY16-17 forecasts are relatively unchanged.  

Downgrade to SELL.  After updating  KLK’s latest net debt, we lower our SOP-based  TP  to  MYR19.70  (from  MYR20.70).  In  our  opinion,  KLK’s extensive expansion into the Indonesian  refinery space may take some time to  yield  strong  returns,  and  the  recovery  of  the  fatty  alcohols  and surfactant  margins  are  very  much  dependent  on  crude  oil  prices.  As such, we downgrade our recommendation to SELL (from Neutral).

Source: RHB