Kuala Lumpur Kepong - MARKET PERFORM - 25 May 2012

Period   2Q12.

Actual vs.  Expectations

Results were below expectations due to lower than expected FFB production and possibly higher than anticipated fertilizer cost. The 1H12 net profit of RM556m made up only 37% of the consensus’ forecast of RM1,483m and 39% of our forecast of RM1,438m.

2Q12 FFB production of 711k mt is 5% below our estimate of 747k mt as the tree stress effect has been greater than expected.

Dividends  Interim single tier dividend of 15 sen was announced (no changes from last year).

Ex-date is 12-July-2012.

Key highlights

QoQ, the earnings dropped by 37% due to a seasonally lower FFB production in 2Q12 at 711k mt (-21% QoQ) and seasonally weak result from retail division.

YoY, the earnings declined 43% as the FFB production declined 1% YoY to 711k mt while average CPO price of RM2,803 per mt was 8% lower than last year’s level of RM3,041 per mt.

Higher fertilizer cost could be another reason.

Outlook  FFB production should recover in 2H12 due to seasonality. However, YoY FFB growth in FY12E will be minimal at 3.2%.

Fertilizer cost should normalize in 2H12 in line with lower crude oil prices so far in 3Q12.

However,  YoY  fertilizer  cost  in  FY12E  will  be higher by 10%.

Change to Forecasts

Revised down our FY12-13E net profits by 7%-4% to RM1.34b-RM1.40b, as we trim FFB yields by 5%-3% to 21.7mt/ha – 21.5mt/ha.

The cost of production for CPO has been increased by 3% to RM1,100 per mt for both FY12-13E after imputing higher fertilizer cost.

Rating  Maintain MARKET PERFORM

Unexciting FY12E-FY13E core net profit growth of 1%-4% should cap sharp upside potentials.

Valuation   We have lowered our target price by 6% to RM22.10 (previously RM23.60). Our valuation is based on unchanged 17.5x Fwd. PER on the lower FY12E EPS of 126.2 sen (previously 135.0 sen).

Risks  Sustained drop in CPO prices.  

Source: Kenanga