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This article first appeared in The Edge Financial Daily on May 18, 2018

Kuala Lumpur Kepong Bhd
(May 17, RM24.42)
Maintain hold with a target price (TP) of RM26.46:
Kuala Lumpur Kepong Bhd’s (KLK) second quarter of financial year 2018 (2QFY18) core profit dropped 46% quarter-on-quarter (q-o-q) and 38% year-on-year (y-o-y), bringing first half of FY18 (1HFY18) earnings to RM478.7 million (-27% y-o-y) as the margin was squeezed by the lower average selling prices (ASPs) of palm products.  

 

Overall, net profit came in below our and consensus expectations, making up only 40% of our and consensus full-year forecasts. KLK declared an interim dividend of 15 sen (FY17: 15 sen), payable on Aug 7, 2018.  We maintain our earnings forecast and TP of RM26.46. We foresee margin improvement especially from the manufacturing segments to continue to generate a steady cash flow moving forward and act as cushion to the plantation segment.

KLK recorded a core profit margin of 4.8% versus 6% in 1HFY17, bringing 1HFY18 core profit to RM478.7 million, as a result of narrowing margins from the plantation and property segments, as well as lower contribution from the share of results from associates. Meanwhile, the manufacturing margin improved to 5.8% from 1.5% in 1HFY17 on account of higher sales volume supported by the stabilised raw material cost of crude palm kernel oil during the period. Oleochemical operations performed better with higher capacity utilisations and efficiency to bring a substantial profit of RM253 million (1HFY17: RM65.5 million) during the period.

On a q-o-q basis, net profit fell 46% to RM167.1 million on account of a lower revenue of RM4.685 billion(-10% q-o-q). This was due to the effect of the lower ASPs of crude palm oil (CPO) and palm kernel as well as lower production for both fresh fruit bunches and CPO. This was also aided by a lower profit of RM110.9 million (1QFY18: RM141.8 million) from the manufacturing segments as gross margins had declined particularly in the China and Europe operations.

The board has declared an interim single tier dividend of 15 sen (FY17: 15 sen) for FY18, payable on Aug 7, 2018. At current market price, this would translate into a dividend yield of 0.6%

We maintain our FY18 and FY19 earnings forecast with an unchanged TP of RM26.46 based on a price-earnings ratio (PER) of 23 times (KLK’s five-year average PER) and FY18 earnings per share. We believe KLK’s fundamentals remain solid with a strong cash position (RM1.04 per share) and lower net gearing (0.36 times), plus established downstream activities acting as a buffer against any potential downside risk from upstream business. KLK has the required strong financials to diversify earnings and contribute to long-term growth, in our opinion, if the need arises. — BIMB Securities Research, May 17

 

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