Headwinds seen for KLK in upstream plantation segment

This article first appeared in The Edge Financial Daily, on August 16, 2018.
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Kuala Lumpur Kepong Bhd
(Aug 15, RM24.80)
Maintain hold with a lower target price (TP) of RM23.36:
Kuala Lumpur Kepong Bhd’s (KLK) nine months of financial year 2018 (9MFY18) core net profit (CNP) of RM691.9 million came in below expectations, accounting for only 62.8% and 63.3% of consensus and our full-year forecasts. The weaker-than-expected performance came largely from lower-than-expected realised palm product prices and property development earnings.

Third quarter ended June 30, 2018 (3QFY18) CNP increased marginally on a quarter-on-quarter basis (by 1%) to RM194.7 million, mainly on lower fresh fruit bunch production and palm product prices (which have collectively resulted in adjusted operating profit at the plantation division declining by 37% to RM138.8 million), which were more than mitigated by improved performance at the manufacturing and property development divisions.

3QFY18 CNP increased year-on-year by 22.1% to RM194.7 million, as weaker plantation earnings (arising mainly from lower palm product prices) were more than mitigated by improved manufacturing earnings (arising from the absence of lumpy inventory write-down, and lower raw material costs, which had in turn resulted in better profitability) and improved property earnings.

9MFY18 CNP declined by 9.8% to RM691.9 million as improved manufacturing performance (adjusted operating profit surged 2.8 times to RM380 million on lower raw material prices and absence of lumpy inventory write-down) was more than offset by lower plantation earnings (arising mainly from lower palm product prices and negative contribution from processing and trading operations) and lower property earnings.

We lowered our FY18 to FY20 CNP forecasts by 8.8%, 3.8% and 3.9%, respectively, largely to account for lower realised palm product prices in 9MFY18, higher crude palm oil production cost assumption, and lower property earnings assumptions.

Post downward revision on our CNP forecasts, we lowered our sum-of-parts-derived TP on KLK by 2.5% to RM23.36. While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations and near-term headwinds within the upstream plantation segment. — Hong Leong Investment Bank Research, Aug 15