This article first appeared in The Edge Financial Daily on February 20, 2019
Kuala Lumpur Kepong Bhd
(Feb 19, RM25)
Maintain neutral with a target price (TP) of RM22.86: Kuala Lumpur Kepong Bhd (KLK) posted a core net profit of RM175.2 million — year-on-year (y-o-y): -45.2% — for the first quarter of financial year 2019 (1QFY19) after stripping out the provision for and write-off of inventories at RM19.6 million, a surplus on the government’s acquisition of land (RM22.4 million), a foreign exchange gain (RM33.3 million) and a gain on derivatives (RM39 million).
The results are broadly in line with our numbers, making up 21% but it missed consensus expectations by 7%. Overall, the upstream plantation was severely affected by a continuous poor crude palm oil (CPO) price performance, while the manufacturing segment was dragged by its China and European Union (EU) operations. No dividend was declared for the quarter. We maintained our “neutral” rating with an unchanged TP of RM22.86.
Compared with that for 1QFY18, the weaker group revenue was mainly hit by a decline in plantation and manufacturing sales. Plantation sales tumbled 58% y-o-y to RM1.7 billion, dragged by a steep decline in palm oil product prices despite a 7% increase y-o-y of fresh fruit bunch (FFB) production. The average recorded CPO price dropped 29% y-o-y to RM1,840 per tonne, while the average palm kernel price dipped from RM2,488 to RM1,375 per tonne.
Manufacturing sales declined 12.4% y-o-y to RM2.2 billion on a weaker sales volume from China and European operations, but partly cushioned by stronger Malaysian sales. Property sales doubled to RM39.8 million, bolstered by the ongoing Hemingway Residence project in Bandar Sungai Buloh, consisting of super-link terrace houses and semi-detached homes.
The group’s core earnings sank 45% y-o-y to RM175 million for 1Q. Plantation earnings halved to RM127 million, dragged by an increase in the cost of production and weaker selling prices. The manufacturing segment also saw weaker earnings, down 29% y-o-y to RM98 million on weaker earnings contribution from China and EU operations, despite better earnings from Malaysia.
Oleochemical earnings dipped 31% y-o-y to RM94.5 million, while other manufacturing units jumped nearly sixfold to RM3.5 million. Property earnings surged sixfold to RM11.1 million on favourable property sales in Bandar Seri Coalfields. The farming business delivered an impressive earnings growth too, up 77% to RM56.5 million, driven by an increase in crop production as a result of better yields and a larger cropped area.
It expects to see CPO prices hovering at about RM2,100 to RM2,200 per tonne for the next three months. Also, management expects the FFB production to surpass the four-million-tonne level for FY19 with an expected growth of 5% to 6%. — PublicInvest Research, Feb 19