This article first appeared in The Edge Financial Daily on February 19, 2020

Kuala Lumpur Kepong Bhd
(Feb 18, RM23.14)
Maintain neutral with an unchanged target price of RM23.64: Kuala Lumpur Kepong Bhd’s (KLK) normalised earnings for the first quarter ended Dec 31, 2019 (1QFY20) were at RM178.8 million — up 14.8% year-on-year (y-o-y). Despite its 1QFY20 revenue contracting marginally by 0.2% y-o-y to RM4.08 billion, the earnings growth was mainly boosted by a better crude palm oil (CPO) price. This offset a reduced fresh fruit bunch (FFB) production.

All in, KLK’s 1QFY20 financial performance was within our but slightly below consensus’ expectations — 20.2% and 19.9% of FY20 earnings estimates respectively.

The segment’s profit improved 23.7% y-o-y to RM157.7 million, mainly attributable to a favourable CPO price — RM2,207 in 1QFY20 versus 1QFY19’s RM1,840 per tonne. However, the segment incurred a higher cost of CPO production in view of an 11.5% y-o-y decline in FFB production to 978,000 tonnes.

KLK’s manufacturing segment’s profit contracted 18.4% y-o-y to RM80 million, in tandem with a revenue decline to RM1.9 billion or 12.8% y-o-y, owing to a lower selling price. The property segment’s profit expanded 22% y-o-y to RM13.6 million, mainly supported by a higher revenue of RM52.2 million (31.1% y-o-y).

Our earnings estimates are unchanged for now. In line with our expectations, a strong CPO price recovery from October 2019 had a positive impact on KLK’s 1QFY20 financial performance. Thus, KLK would be the first, in our coverage, to record annual earnings based on the elevated CPO price, boding well for the upstream segment.

Meanwhile, we expect the oleochemical segment to remain resilient as a contraction in profit margin is to be partially offset by higher capacities coming on stream. A steady profit increase is expected for KLK’s property segment, although the impact on the group is minimal. — MIDF Research, Feb 18