KL Kepong expects higher plantation earnings, says CIMB Research

KUALA LUMPUR: Kuala Lumpur Kepong (KLK) expects higher plantation earnings for the financial year ending Sept 30, 2017 due to expectation of higher fresh fruit bunches (FFB) production in the coming months, driven by the projected recovery in FFB yields from the El Nino event. 

It said on Wednesday that however, the group expects its oleochemical division to report lower profit in FY17 due to the write-down in the value of its stocks in the third quarter ended June 30, 2017 (Q3, FY17) as well as the challenging and competitive market environment for oleo. 

“We maintain our earnings forecasts, sum-of-parts target price (of RM27.15) and Hold call. The implied FY17F P/E for KLK at our SOP valuation is 25.1 times, which is in line with the group’s historical five-year average forward P/E. 

“We expect the share price to be supported by the group’s strategic estate land bank in Malaysia. Key upside and downside risks for KLK are higher and lower CPO prices as well as FFB yields,” it said.

To recap, KLK’s core net profit grew 9% on-year to RM791mil in 9MFY9/17 as higher plantation earnings more than offset weaker manufacturing contributions. This was broadly in line with CIMB Research’s but it was below Bloomberg consensus expectations. 

The 9MFY17 core net profit made up 69% of our but only 65% of Bloomberg consensus full-year forecasts. Meanwhile, 9MFY17 reported net profit fell 33% on-year as 9MFY16 saw a RM486mil gain from the sale of plantation land to an associate.  

Plantation’s earnings before interest and tax (Ebit) grew 10%/68% on-year in 3Q/9MFY17 to RM233mil/RM1.019bil due to higher average selling prices (ASPs) for palm products and production. 

However, 3QFY17 plantation Ebit fell 36% on-quarter due to lower CPO and PK prices as well as higher unrealised forex loss of RM25.7mil during the quarter. 

In 3QFY17, average CPO and PK prices fell 11% and 29% on-quarter, to RM2,674 and RM2,111 per tonne, respectively.

FFB output rose 19%/11% on-year in 3Q/9MFY17 as FFB yields recovered from the El Nino impact.  

However, the manufacturing division reversed into a pretax loss of RM5mil in 3QFY17. This was due mainly to volatile prices of crude palm kernel oil (key raw material for its oleo business) during the quarter. 

This resulted in a mismatch in the selling prices of oleo products against the raw material purchase price, leading to the write down of RM60.3mil in stocks in 3QFY17. As a result, manufacturing profit fell 72% in 9MFY17. 

KLK’s FFB output growth of 11% on-year for 9MFY17 was in line with the group’s guidance of 10%-12% for FY17. The group provided full impairment for its non-core and non-performing investments in China amounting to RM31.9mil in 3QFY17.

“We have stripped this out as a non-core item. KLK also recognised a dividend income of RM28.7mil in 3QFY17 from its overseas investment, Synthomer plc,” said CIMB Research.