KL Kepong retained at Hold by CIMB Research

KUALA LUMPUR: CIMB Equities Research is maintaining its Hold call for Kuala Lumpur Kepong (KLK) as it sees the share price supported by its rich assets and plans to unlock some of its estates landbank value.

The research house had on Thursday lowered the earnings per share (EPS)  for  FY16 and FY17 by 2% to 4%, as it cut its fresh fruit bunches (FFB) yield assumptions due to the recent dry weather in Indonesia.

“However, we raise our target price as we roll over our sum-of-parts (SOP) valuations to end-2016,” it said.

 KLK's final core net profit fell 12% to RM870m due to lower crude palm oil (CPO) prices and downstream margins. FY15 core net profit was broadly in line, accounting for 102% of our and 97% of consensus full-year estimates.

“However, final dividend of 30 sen was below our forecast of 45 sen as the group lowered its dividend payout ratio,” it said. 

All divisions except manufacturing posted weaker 4Q earnings. It said the 4QFY15 net profit grew 9% on-year as higher manufacturing contributions offset lower plantation earnings.

On a quarter-on-quarter basis, KLK’s 4Q net profit fell 25% due to the absence of RM53.4mil dividend income from Synthomer and weaker oleo earnings.

Plantation posted weaker EBIT in 4Q due to lower selling prices and higher costs.

Manufacturing delivered higher profit thanks to higher fatty alcohol products sales volumes and improved oleo profit margin. 

Fresh fruit bunches (FFB) production for the quarter (July-September 2015) rose 3% on-year and 6% on-quarter driven by improved yields.

“This was below our forecast due to dry weather in some parts of its estates. The average selling price (ASP) for CPO of RM1,960 per tonne achieved in 4Q was below MPOB's average price of RM2,048 per tonne as its Indonesian palm product prices were negatively affected by the new US$50 per tonne levy on CPO since mid-July. 

“Downstream remains profitable despite fair value (FV) losses on derivatives. KLK indicated that its refineries experienced negative refining margins in 4QFY15,” it said.

Similar to IOI, its manufacturing division was negatively affected by unrealised fair value loss of RM76.3m from changes in FV on outstanding derivative contracts. However, this division still managed to record a profit of RM45mil for this quarter, after accounting for the derivatives losses.

“The group said current CPO price has been negatively affected by high stocks, ample supply of competing edible oils and the levy of US$50 per tonne on CPO in Indonesia.

“It expects the performance for the plantation sector to be challenging at prevailing CPO prices.

“It expects the oleo division to face a difficult environment but thinks profit from this unit will be favourable in FY16, driven by improved productivity and new capacities,” said CIMB Research.