PLANTATION group Kuala Lumpur Kepong Bhd’s (KLK) normalised earnings increased by 14.8% to RM178.8 mil despite revenue declining by 0.2% for 1QFY20 (Y/E Sept 20).
According to MIDF Research, the higher earnings were propelled by better crude palm oil (CPO) prices which rose by 19.9% during the quarter to RM2,207/mt.
“All in, the group’s 1QFY20 financial performance came in within ours but slightly below consensus expectations, accounting for 20.2% and 19.9% of full-year FY20 earnings estimates respectively,” said MIDF.
KLK’s manufacturing segment’s profit contracted by 8.4% yoy to RM80.0 mil. This was in tandem with the decline in revenue to RM1.9 bil (-12.8% yoy) due to lower selling prices.
The property development division did well with profit expanding by 22.0% yoy to RM13.6 mil. This was mainly supported by higher revenue of RM52.2 mil (+31.1% yoy).
Meanwhile, RHB Research said KLK’s results were slightly below its and street expectations, at 18-20% of FY20F estimates. Fresh fruit bunch (FFB) output was slightly weaker than expected due to the dry weather at its estates in Peninsular Malaysia and Indonesia in 3Q19. Its wheat farming operations in Australia also suffered from dry weather.
“We expect 2HFY20 to show better earnings on output recovery for FFB and wheat operations,” said RHB Research.
FFB output fell 14% yoy in 1QFY20, below RHB’s 4% growth projection for FY20 and management’s guidance of 3-5%. In 4MFY20, FFB output declined further to -15% yoy, mainly due to underperformance at its Sabah estates and higher replanting activities.
KLK expects FFB growth to recover in 2HFY20, with improvements seen at its Peninsular Malaysia and Indonesian estates, and is not reducing its FFB growth guidance at this juncture.
“However, to be conservative, we reduce our FFB growth forecast for FY20 to -1% (from +4%), but leave our FY21-22 growth forecasts at 3-4% pa,” said RHB Research.
On oleochemicals, EBIT margins rose in 1QFY20 to 5.1% (from 4.1% in 1QFY19) despite an increase in feedstock prices. Going forward, margins could moderate, on the back of rising feedstock prices.
RHB has projected the downstream division to post EBIT margins of 4.5-5% for FY20F-21F.
The research firm expects KLK to post better profits in 2HFY20, on the back of an anticipated recovery in its FFB output in both Malaysia and Indonesia, while the normalisation of weather in Australia should also result in better wheat farming profits in the next seasonal output period of 3QFY20.
RHB has maintained its buy call on KLK with a lower SOP-based TP of RM27.10, post-adjustment of earnings, imputing the latest net debt and adjusting for the latest market prices for its associate Synthomer and MP Evans Group investment. Its valuation is based on an unchanged 30x FY20F P/E for its plantation unit, 15x for its manufacturing unit, and with a 60% discount applied to the RNAV of its property landbank.
MIDF has ascribed a TP of RM23.64 for KLK, premised on pegging FY21 EPS of 88.5 sen against a forward PER of 26.7x. It has maintained its neutral call on the stock.
At noon today, KLK shares were traded at RM23.12, down 62 sen or 2.6%, from yesterday’s close. The volume traded was 382,000 shares. – Feb 18, 2020