KUALA LUMPUR: OSK Investment Research said it likes KL Kepong for its double-digit production growth, made possible by the hive of planting activities in the past few years.
The research house said on May 28 that although production for the March quarter trailed last year’s level, April production growth indicates that it is recovering. KLK’s production growth momentum will likely be maintained given the company’s still-young age profile.
“Still, given our negative outlook for CPO price, especially in 2H, we believe its stock price could weaken. Maintain Sell,” it said. Its target price was RM9.95.
On May 27, KLK announced net profit of RM112.68 million for the second quarter (2Q) ended March 31, 2009, down 52% from RM236.66 million a year ago, as profits from plantation and manufacturing divisions fell.
However, the company was positive in its outlook for the year, expecting its core plantation business should continue to perform “reasonably well” with the group’s favourable forward sales of its palm products.
OSK Research said KLK’s annualised 1HFY09 core earnings came in 17.2% below its forecast and 5.6% below consensus.
“We expect 2HFY09 to be stronger and make up for the 1H weakness. Hence there is no change in our forecast. Core net profit for the quarter fell by 49.9% quarter-on-quarter as plantation segment earnings before interest and tax (EBIT) fell by 34.7% on lower CPO prices and a 13.5% decline in production,” it added.
The research house said the 20% quarter-on-quarter increase in market average crude palm oil (CPO) price should have at least compensated KLK’s 13.5% decline in fresh fruit bunches (FFB) production. Despite that, its plantation segment topline fell by 22.4% reflecting a potentially lower forward sale.
After an inventory write-off dragged the segment into a loss last quarter, KLK’s downstream business turned in profit of RM5.8 million. Margin,however, remains razor-thin, at just 1.0%. On the other hand, the retailing segment lost RM39.5 million against RM30.5 million profit in the December quarter.
KLK’s net borrowings stood at RM576 million translating into a net gearing of 11.2%. The company generated RM626.7m in operating cash in the 1H, up significantly from RM278.2 million in 1H last year. A 10 sen single-tier interim dividend has been declared.