KLK’s 9M17 results carried by its upstream segment
KUALA LUMPUR: Kuala Lumpur Kepong Bhd’s (KLK) results for its first nine months of 2017 (9M17) has seen a year-onyear (y-o-y) 18 per cent increase in core net profit (CNP), carried by a 68 per cent jump in operating profit in its upstream segment.
According to the team at Kenanga Investment Bank Bhd (Kenanga Research), the large jump in KLK’s upstream segment was thanks to higher crude palm oil prices (CPO) and fresh fruit bunch (FFB) production recovery – both seeing an annual increase of 27 and 11 per cent, respectively.
This boosted the group’s 9M17 CNP to come in at RM842 million which was broadly within consensus and Kenanga Research’s full-year estimates at 69 and 70 per cent respectively.
The increased performance was also able to offset the dismaying performance of KLK’s downstream segment that saw a y-o-y 73 per cent fall in operating profit that occurred in spite of a palm kernel (PK) price increase of 54 per cent y-o-y.
“This was due to sharp volatility in the first half of 2017 (1H17), as prices traded between RM3,953 per metric tonne (MT) in mid-April and RM8,428 per MT at the end of January, causing a price mismatch and customers to turn cautious,” explained the research arm.
Quarter-on-quarter (q-o-q), the group’s upstream segment was not able to offset the losses incurred in its downstream segment as its upstream operating profit saw a 29 per cent weakening to RM263 million, on the back of lower CPO prices and flattish FFB volume.
This resulted in a quarterly weakening of the group’s CNP by 39 per cent as its persisting PK price volatility had caused a stock write-off totalling RM60.3 million in its downstream segment.
Looking forward, KLK’s management has shared that they expect its plantation profit to improve more on higher FFB production post-El Nino phenomenon.
“We concur given the strong production recovery shown especially in Peninsular Malaysia, of which circa 27 per cent of KLK’s planted area is located, second only to Sime Darby’s circa 37 per cent among planters under our coverage,” affirmed the research arm.
This may however be off-set by softer CPO prices as production improves regionally.
On the other hand, the research arm has ntoed that PK prices have finally stabilised closer to RM4,000 per MT and expects to see margin improvement for KLK downstream segment in 4Q17.
Meanwhile, KLK is also likely to aggressively continue with its plantation land bank expansion efforts in FY17-18, as they have previously demonstrated their appetite for expansion via its widely publicised and aggressive bid for MP Evans Group Plc’s landbank in Indonesia earlier this year.
With that said, Kenanga Research reiterated its ‘market perform’ call on the stock with a lower target price of RM26.40 from RM26.56 previously.