KLK’s 9MFY15 (Sep) results were in line with our but below consensus FY15 forecasts. We remain NEUTRAL, but trim our SOP-based TP to MYR19.55 (from MYR21.50, 3% downside), after a slight earnings reduction. While we believe valuations remain fair at this juncture, we highlight KLK’s sensitivity to CPO prices, where every MYR100/tonne change would impact its net profit by 4-6% pa.

In line. Kuala Lumpur Kepong’s (KLK) 9MFY15 core net profit was in line with our but below consensus expectations, coming in at 77% of our and 69% of consensus FY15 forecasts respectively. The companyrecorded an EI loss of MYR19.2m in 3Q15 comprising an unrealised lossfrom derivatives in the manufacturing division of MYR8.6m, a MYR12.6m gain on release of inter-company interest and an unrealised loss on derivatives in the plantation division of MYR23.2m.

Higher CPO costs. 9MFY15 core net profit fell 21% YoY despite a 16% YoY rise in revenue. The increased revenue came from new contributions from its Indonesian refineries, higher FFB production (+1.6% YoY) and higher oleochemical sales volumes, offset by lower prices of CPO (-11.3% YoY) and palm kernel (PK) (-8% YoY). Profitability declined from weaker EBIT margins in all divisions, due to lower CPO prices, higher CPO production costs, lower margins incurred at its oleochemicals unit as well as minor losses recorded at its property division due to the timing of recognition of profit from property sales.

Forecasts. Although our forecasts are in line, we trim FY16F-17F earnings by 2-5%, after taking into account lower FFB production for FY16-17 of 1.6-2.5% (from 3.5-4%), as we impute the impact of dry weather in Sabah into our forecasts. We also reduce our FY16 CPO price assumption to MYR2,425/tonne (from MYR2,500) and update our latest in-house USD/MYR exchange rate assumptions. We make nochange to our FY15F earnings.

Maintain NEUTRAL. Post-earnings revision, we lower our SOP-based TP to MYR19.55 (from MYR21.50). We also pare down our target P/E for the plantations division to 17x 2016 (from 18x) to account for the weak market sentiment and foreign outflow of funds in the market. We believe valuations are fair at this juncture and maintain our NEUTRAL stance on the stock. We highlight that every MYR100/tonne change in CPO prices could affect KLK’s net profit by 4-6% pa.