KLK - Running Out of Time

While maintaining a BUY call on KL Kepong (KLK), we trimmed our profit forecast on a disappointing June quarter which rendered our forecast unachievable with only one more quarter to go. While the plantation segment was disappointing, there was a silver lining in its oleochemical business which saw a sizeable q-o-q boost. We continue to like KLK for being among the best-managed plantation companies with a strong corporate discipline and good age profile. KLK also offers a fair amount of geographical diversification across East and West Malaysia and Indonesia.

Disappointing 9M. KLK’s 9MFY12 results were disappointing, with core earnings of RM775.0m, making up only 50.4% of our full year forecast. Against consensus, KLK’s earnings were also a letdown, making up 57.3% of the full year forecast.

Plantation segment disappoints. The plantation segment made RM906.7m for the 9M, 20.4% lower than last year, on the back of a 3.5% reduction in the realised CPO price, 1.9% reduction in realised rubber price and 1.9% decline in FFB production. What was very disappointing was that on a q-o-q basis, KLK’s segment EBIT fell by 26.4% despite a 3.0% rise in FFB production and improved CPO price of RM3,010 per tonne against RM2,803 per tonne in the 2Q. This was likely due to the negative refining margin which continued to hamper Malaysian refiners. FFB production for the June quarter was also dismal with April, May and June numbers registering y-o-y double-digit declines. 

Further recovery in oleochemicals. On a YTD basis, the manufacturing EBIT of RM136.7m were lower by 48.8%, but surged by 68.8% q-o-q to RM83.0m. The weak YTD EBIT was largely caused by a shaky 1Q in which KLK registered only RM4.5m in manufacturing EBIT. Still, against 3QFY11’s number of RM104.6m, which was before the introduction of Indonesia’s new export duty structure, EBIT was still lower by 20.6%.

Slashing numbers. We are confident that KLK will perform better in its final quarter as July production was only 3.8% lower y-o-y, indicating that production recovery is underway. However, the shortfall in earnings YTD is too big to make up for in a single quarter. We trimmed our FY12 forecast to RM1,256.5m, cutting production expectations to 3.26m tonnes given the smaller-than-expected production from the June quarter. We also raise the cost of production per tonne to RM1,300 to factor in the dip. Our FY13 forecast is tweaked down slightly to RM1,739.2m from RM1,756.6m previously and the FV is now adjusted down to RM27.00. Maintain BUY.

Source: OSK