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This article first appeared in The Edge Financial Daily, on May 18, 2016.

 

KLK_Table_FD_18May16_theedgemarketsKuala Lumpur Kepong Bhd
(May 17, RM23.00)
Maintain hold with an unchanged target price (TP) of RM22.70:
Excluding a surplus of RM485.6 million arising from the sale of plantation land in the first financial quarter ended Dec 31, 2015 (1QFY16), Kuala Lumpur Kepong Bhd (KLK) posted a higher year-on-year (y-o-y) profit of RM668.4 million (1HFY15: RM591 million).

The higher profit is attributable to its manufacturing segment, which posted better margins of 6% (1HFY15: 3%) as profit surged to RM226.1 million (+146% y-o-y), hence more than offsetting the impact of lower profit from the plantation and property divisions.

The property division incurred a lower profit of RM4.3 million in 1HFY16 (1HFY15: RM42.8 million) as revenue dropped by 64% to RM25.9 million with a slowdown in demand affecting sales. The lower 90% y-o-y profit in 1HFY16 was also due to the surpluses from the disposal of industrial and commercial land incurred in 1HFY15.

The plantation division’s earnings were marginally lower at RM398.5 million (-0.3% y-o-y) as margins decreased to 9.3% from 12.9% in 1HFY15, due to a foreign exchange loss of RM13.5 million (1HFY15: gain RM8.2 million) arising from the translation of loans advanced and bank borrowings to Indonesian companies, and a lower profit from estate operations.

Nonetheless, this performance is not unexpected on account of lower average selling crude palm oil (CPO) prices realised of RM2,075 per tonne (1HFY15: RM2,170 per tonne) during the reporting period.

The manufacturing sector registered a sharp increase in profit of RM226.1 million in 1HFY16  compared with RM91.8 million in 1HFY15, led by higher profits from oleochemical and other manufacturing sub-segments that had surged 148% and 128% to RM211.3 million and RM14.8 million respectively. The improvement in profit was also aided by an unrealised gain of RM23.56 million (1HFY15: unrealised loss of RM14.1 million) arising from fair value changes on outstanding derivatives contracts.

According to the announcement, Europe and China operations contributed to the improved profit through better sales volume, although an increase in cost of raw materials had narrowed profit margins, especially of the Malaysian entities. Its fatty alcohol business was affected by higher crude palm kernel oil prices, which gave a cost advantage to lower cost synthetic-based substitutes.

An interim single-tier dividend of 15 sen was declared which is in line with last year’s payment. We maintain our “hold” call. We keep our FY16 and FY17 earnings forecasts unchanged and maintain our TP at RM22.70, based on unchanged price earnings ratio of 21 times over FY17 earnings per share estimates. — BIMB Securities Research, May 17

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