KLK to release 1QFY17 financial results tomorrow

Kuala Lumpur Kepong Bhd (Feb 10, RM25.08)

Maintain buy with an unchanged target price (TP) of RM29.25: Kuala Lumpur Kepong Bhd (KLK) is expected to release its first quarter financial year 2017 (1QFY17) financial results tomorrow. We are expecting its core net income to be in the range of RM320 million to RM350 million.

Plantation division earnings should improve quarter-on-quarter (q-o-q) and year-on-year (y-o-y). The q-o-q improvement is mainly driven by higher crude palm oil (CPO) price and fresh fruit bunch (FFB) production. Against the same quarter last year, the better CPO price is expected to more than offset the marginal decline in FFB volume. To recap, the plantation division is the biggest earnings contributor for KLK with an operating profit of RM827 million in FY16.

While we expect KLK’s manufacturing division revenue to register positive growth due to higher sales volume in Europe and China, its margin is likely to be affected by high crude palm kernel oil. Having said that, we are not overly concerned as manufacturing division earnings contribution is less significant than plantation with an operating profit of RM371 million in FY16. Lastly, earnings outlook for the property division is lacklustre in line with the slowdown in the sector but its contribution to the group is minimal with an operating profit of RM25 million in FY16.

Our earnings estimate for FY17 and FY18 are unchanged. The TP is based on an unchanged forward price-earnings ratio of 26.8 times on FY17 earnings per share forecast of 109.2 sen. We maintain our “buy” call as KLK is expected to benefit significantly from the high CPO price as 64% of earnings contribution came from its upstream plantation division. — MIDF Research, Feb 10

This article first appeared in The Edge Financial Daily, on Feb 13, 2017.

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