Review

• KFIMA’s 2QFY18 results came in within expectations. Excluding unrealised forex and other non-core items, 2QFY18 core net profit increased by 19.9% YoY to RM12.4mn. The improvement in earnings was mainly due to favourable profit mix resulted in lower minority interest in the quarter under review. At PBT level, the adjusted earnings dropped by 4.5% YoY, which we believe it was due to expiry of passport printing contract.

• 1HFY18 core net profit decreased by 7.8% YoY to RM20.4mn, accounting for 54% of our full-year earnings estimates.

• Manufacturing: 1HFY18 revenue plunged 40.6% YoY to RM75.5mn, mainly due to decrease in sales volume of travel document. On the back of lower revenue, PBT decreased by 54.3% YoY to RM14.8mn.

• Plantation: This division registered a 53.7% YoY growth in PBT in 1HFY18, as a result of higher sales of CPO, FFB and pineapple. CPO and CPKO sales volume increased 5.5% and 14.6% YoY to 25,257 tonnes and 2,378 tonnes, respectively. The average selling price of CPO was flattish YoY at RM2,376/tonne while the CPKO price decreased by 19.8% to RM4,069/tonne.

• Bulking: 1HFY18 PBT dropped 20.0% YoY to RM9.1mn, in tandem with 11% drop in revenue. The decrease was mainly due to lower contribution from most of the products segments. This division was also impacted by the effects of low palm oil inventories nationwide.

• Food: 1HFY18 revenue increased by 19.0% YoY to RM60.8mn, driven by higher local sales of canned mackerel and tuna as well as exports of tuna products. Nonetheless, PBT decreased to RM1.4mn (-32.5% YoY) mainly due to forex loss.

• There was no dividend declared for the quarter under review.

Impact

• No change to our earnings forecasts.

Outlook

• Following the expiration of a supply contract for Malaysian passport, management will realign it efforts to focus on establishing new strategic alliances by developing new products and solutions.

• FFB yield is recovering and is expected to improve further. We expect FFB production growth to accelerate over the next three years, mainly due to new estates coming into maturity in Sarawak and Peninsular Malaysia.

• The lower contribution from the manufacturing division will be partly offset by higher profit from the plantation division.

Valuation

• Maintain KFIMA’s target price at RM1.89, based on DDM valuation with cost of equity of 8.5% and terminal growth rate of 4.0%. The TP implies a forward CY18 PER of 13.3x. As the share price retreated to a levels which generate decent dividend yield (5.3%), we upgraded the stock to BUY from Hold.

Source: TA Research - 27 Nov 2017