A good start to FY2017 for Kuala Lumpur Kepong

Kuala Lumpur Kepong Bhd (Feb 15, RM25)

Maintain hold with a higher target price (TP) of RM25.55: Quarter-on-quarter, Kuala Lumpur Kepong Bhd’s (KLK) first quarter of financial year 2017 (1QFY2017) core net profit increased by 55.6% to RM341.1 million, due to: i) higher plantation earnings arising from higher palm product prices, better sales volume of crude palm oil and palm kernel, higher fresh fruit bunch (FFB) production and positive contribution from processing operations; and ii) a sharp increase in earnings contribution from the farming business (wheat and cattle businesses) arising from favourable weather conditions. All these more than offset weaker performance at the manufacturing division, which in turn was due to margin compression arising from higher raw material prices (in particular crude palm kernel oil [CPKO]) and weak demand.

Year on year, 1QFY2017 core net profit increased by 83.3% to RM341.1 million, boosted mainly by higher plantation earnings (which in turn were driven by higher palm product prices) and better performance at the property and farming divisions. All these more than mitigated weaker performance at the manufacturing division, which was affected by rising raw material costs (in particularly CPKO).

FY2017 to FY2019 core net profit forecasts are raised by 14.4%, 4.9% and 6.2% respectively, as we raise our FFB yield and property earnings assumptions.

While we like KLK for its oil palm plantation estates’ age profile and healthy balance sheet, we opine further upside to its share price is capped by its rich valuations and weak property sentiment (which will in turn drag its overall performance).

Sum-of-parts-derived TP is raised by 4.2% to RM25.55 as we raise our core net profit forecasts and update our valuation parameters. — Hong Leong Investment Bank Research, Feb 15

This article first appeared in The Edge Financial Daily, on Feb 16, 2017.

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