Kuala Lumpur Kepong Bhd
(Nov 20, RM22.36)
Downgrade to add with target price of RM23.04: KLK’s headline net profit for the fourth quarter ended September of financial year 2014 (4QFY14) declined year-on-year (y-o-y) and quarter-on-quarter (q-o-q) mainly due to a loss recorded by manufacturing, attributable to reduced margins, write-down of stocks, an unrealised loss on derivative contracts and a loss on oleochemicals.
KLK’s 12-month (12M) FY14 headline net profit increased by 8% y-o-y due to higher profit from plantations, partially offset by lower contributions from manufacturing and properties. In plantations, better average selling prices (ASP) for crude palm oil (CPO) and palm kernel (PK), reduction in production costs and increased sales volume more than offset the negative contribution from refineries and lower rubber prices.
Adjusted for one-off items, 12MFY14 core net profit amounted to RM1.077 billion, which is within our forecast of RM1.104 billion and consensus average of RM1.11 billion. A net dividend per share (DPS) of 55 sen has been declared, which is higher than the 50 sen paid in 12MFY13 but lower than our forecast of 70 sen. Dividend payout is maintained at around 60%.
Management commented that the impending large US soybean harvest and low crude oil prices are putting “a resistance for further rise in [CPO] prices”.
The stock price has rebounded significantly from the low in October this year and at the current price, the stock rating is downgraded from “buy” to “add”. High fresh fruit bunch production growth will also drive the long-term fundamentals of KLK. Key downside risks include:(i) economic slowdown cutting prices of vegetable oils and crude oil; (ii) high production of vegetable oil and/or changes in rules and regulations; and (iii) foreign exchange losses due to currency weakness in key operating countries. — Affin Hwang Capital, Nov 20
This article first appeared in The Edge Financial Daily, on November 21, 2014.