The research house said KLK’s output growth reflected its replanting efforts in Malaysia in the past few years, as well as new planting in Indonesia.

“While maintaining our sell call, we have raised our target price by 16.5%. Investors who must own plantation stocks should switch to KLK, away from other big-cap plantation stocks, all of which are trading in excess of 20 times earnings,” it said.

The planter had announced its third quarter (3Q) ended June 30, 2009 results on Wednesday, reporting a 22% year-on-year (y-o-y) decline in net profit to RM190.24 million due to lower earnings from its business operations. Revenue fell 24% y-o-y to RM1.53 billion.

For the nine months to June 30, 2009, KLK’s net profit fell 38% to RM231.08 million from a year earlier, while revenue declined marginally to RM182.22 million against RM188.47 million.

OSK Research said, however, the planter’s annualised 9MFY09 core earnings came in at RM611.7 million, which was 15.9% below expectations and 25% below the research house’s expectations.

“The one-off items we removed from the quarter’s results were subsidiary Davos Life Science Pte Ltd’s impairment of RM25.3 million, and UK-associate Yule Catto & Co plc’s investment write-back amounting to RM94.4 million,” it said.

It also said KLK’s oleochemical segment posted a year-to-date (YTD) profit of RM47.5 million versus RM147.7 million a year earlier, while profit in the plantation segment fell 29.9% to RM673.9 million on a weaker realised crude palm oil (CPO) price of RM2,267 per tonne.

It said, however, while the company achieved an 11.8% higher CPO price YTD compared to the Malaysian Palm Oil Board’s average of RM2,027 for the June quarter alone, its realised price of RM2,330 was lower than the market average of RM2,544.

On another note, OSK said despite KLK’s weaker earnings, operating cash flow for the nine-month period improved to RM765.9 million from RM496.6 million a year earlier, due to a reduction in working capital requirements as a result of lower prices.

Its net debt remained relatively low at RM497.7 million, translating into a net gearing of 9.4%, it said.

“Given the weaker-than-expected core earnings, we are trimming our earnings forecast for FY09 to RM639.2 million from RM815.2 million previously, to factor in more prudent cost assumptions.

The research house has pegged KLK’s target price-to-earnings at 14 times, from 12 times previously, in line with other big cap planters, resulting in a higher target price of RM11.59 from RM9.95.

This article appeared in The Edge Financial Daily, August 28, 2009.