Review

• Excluding the forex impact and other non-core items, FY19 core profit declined by 24.2% YoY to RM602.1mn, accounting for 91% of our and consensus’ full-year estimate. Both plantation and manufacturing divisions posted weaker earnings on YoY basis.

• Plantation: Despite higher FFB (+4.5% YoY) and CPO (+5.6% YoY) production, FY19 operating profit decreased by 52.3% YoY to RM400.4mn mainly due to increase in cost of production as well as weaker average selling prices of CPO (-17.6% YoY to RM1, 924/tonne) and palm kernel (- 38.5% YoY to RM1, 210/tonne).

• Manufacturing: FY19 operating profit was slightly lower at RM434.6mn (-0.7% YoY) due to decrease in selling prices, margin erosion for exports to the European market.

• Property: This segment recorded an operating profit of RM43.9mn (+25.5% YoY) in FY19 compared to RM35.0mn recorded last year. The higher profit was due to completion of high-margin projects.

• According to announcement, a final dividend for FY19 will be declared at a later date (FY18: final dividend of 30 sen/share).

Impact

• Earnings forecasts are revised upward for FY20 and FY21 by 25.6% and 32.5% after factoring in higher CPO price assumptions of RM2400/tonne and RM2,500/tonne for CY20 and CY21, respectively. Meanwhile, we also lower our FFB growth assumptions to be in line with management’s guidance.

Outlook

• Management expects profit for FY20 to be higher due to stronger palm oil prices. The oleochemical division is expected to maintain its performance for FY20 with some additional capacities coming onstream. The higher contribution from the plantation segment is expected to offset lower margin for the manufacturing division.

• We expect higher CPO prices for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.

Valuation

• We upgrade KLK’s TP to RM24.42 (previously RM19.16) based on 26x CY20 EPS. Wih the potential upside of 8.5%, we upgrade KLK from Sell to HOLD.
• Potential re-rating catalysts for the stock include: i) stronger-than-expected FFB growth, ii) improvement in downstream margin, and iii) higher palm oil prices.

Source: TA Research - 20 Nov 2019