KLK’s 1QFY19 earnings broadly within expectations

KUCHING: Kuala Lumpur Kepong Bhd’s first quarter of financial year 2019 (1Q19) core net profit of RM195 million has come in broadly within expectations, meeting consensus estimates at 20 per cent.

Year over year (y-o-y), this was a plummet of 41 per cent due to CPO prices that weakened 29 per cent and poorer oleochemical performance as competition in the segment heightens.

In a results review, research arm of Kenanga Investment Bank Bhd (Kenanga Research) detailed that the group’s operating profit in its plantation segment has fallen 58 per cdent y-o-y to RM127 million as CPO prices plunged to RM1,840 per metric tonne (MT), while palm kernel prices dripped by 45 per cent y-o-y.

This was however mitigated by an 8 per cent increase in fresh fruit bunch (FFB) production.

“Despite cheaper feedstock, Oleochemical profit also fell, by 31 per cent, as margins waned amid stiff competition from Indonesia and a sharp drop in crude oil prices, which made the group’s Methyl Ester-based products less attractive,” said the research arm.

However, quarter over quarter (q-o-q), the segment saw core net profit in 1Q19 up 24 per cent as its profit nearly tripled on lower input cost.

Despite the lower- thanexpected earnings in the quarter, Kenanga Research belives that earnings will only recover moving forward on rising CPO prices and higher FFB output from the group’s plantation segment.

“In addition, PK at current price levels is favourable to downstream margins. Over the longer term, KLK’s earnings growth is expected to remain consistent in view of its stable organic and inorganic expansion tracks.

“The group continues to be on the lookout for acquisitions in the upstream segment, with preference for brownfield oil palm plantations with flat/lowlying land,” detailed the research arm.

Kenanga Research maintains its Market Perform call on the stock with an unchanged target price of RM25.70 pegged to a 23.5fold calendar year 2019 estimated earnings per share of 109.2 sen.

“While KLK’s long- term prospects remain positive as management continues its hunt for M&A targets, we do not see any excitement in the near-term given its average production outlook and the competitive environment in the Oleochemical segment,” concluded the research arm.