KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Kuala Lumpur Kepong due to the limited upside to its sum-of-parts based target price of RM24.90.
It said on Tuesday KLK’s 1HFY9/16 core net profit was in line, at 51% of its full-year forecast and 42% of consensus.
The 2QFY16 core net profit rose 4% on-year due to higher manufacturing profit. However, plantation earnings weaker in 2QFY16 due to lower fresh fruit bunches (FFB) output and forex loss.
“Our EPS forecasts stay; we expect 2HFY16 core net profit to be similar to 1HFY16,” it said.
CIMB Research said KL Kepong’s 1HFY16 core net profit rose 42% on-year, thanks to higher contributions from its manufacturing division and lower effective tax rates. The results were broadly in line with expectation, as it accounted for 51% of its full-year forecast and 42% of consensus numbers.
KLK’s plantation earnings before interest and tax (EBIT) fell 33% on-year in 2QFY16 due to lower FFB output (-7% on-year) and net unrealised forex exchange loss of RM35.8mil arising from the translation of loans advanced and bank borrowings to Indonesian companies.
Average crude palm oil (CPO) price achieved in 2QFY16 was RM2,205, flat on-year and below the Malaysian Palm Oil Board’s (MPOB) average of RM2,404 per tonne due to lower CPO price achieved for its Indonesian production following the implementation of the CPO levy of US$50 per tonne in July 2015.
However, the manufacturing division posted a 59% on-year jump in profit in 2QFY16 to RM109mil due to stronger margins from its oleochemical business. The group revealed that its China and European oleo operations reported higher sales volumes but its Malaysian operations posted narrower margin due to higher costs of raw materials.
CIMB Research said KLK posted weaker property earnings in 2QFY16 due to lower new property sales. However, it recognised RM491mil gain from the disposal of its land and RM41mil from government acquisition of land; these helped to boost its reported net profit to RM964mil in 1HFY16.
“The group sees challenges ahead for its plantation division. Management is of the view that the uncertain economic and weather conditions, together with the anticipation of higher FFB production in the coming months and narrower discount between palm oil and soybean oil prices, could bear some negative effects on CPO prices.
“However, it expects this to be offset by better results from oleo via increased capacities and improve efficiency.
“We expect the group to post flattish half-on-half core net profit in 2H, as stronger plantation earnings may be offset by weaker manufacturing profit. We maintain our Hold call as the stock offers limited upside to our SOP-based target price of RM24.90,” said CIMB Research.
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