Kuala Lumpur Kepong - Results were not too bad Buy

 - Kuala Lumpur Kepong Bhd (KLK) remains a BUY, with an unchanged fair value of RM25.90/share. KLK is a big-cap proxy for a recovery in CPO prices. 

- KLK’s 9MFY12 results were just slightly below our expectations. We have tweaked the group’s FY12F results downwards by 3.6% for housekeeping reasons. KLK’s net profit rose 8.5% QoQ to RM233.1mil in 3QFY12 underpinned by a decline in the effective tax rate. 

- A positive surprise was the continued improvement in the profitability of the manufacturing division. In spite of challenging operating conditions in the April to June quarter, EBIT of the manufacturing division climbed 68.8% QoQ to RM83mil in 3QFY12. 

- EBIT margin of the manufacturing division expanded from 3.9% in 2QFY12 to 6.3% in 3QFY12. 

- KLK’s plantation revenue shrank 6.2% YoY to RM3.9bil in 9MFY12 suppressed by flattish CPO prices and declining palm oil production. 

- KLK realised an average CPO price of RM2,848/tonne in 9MFY12 against RM2,952/tonne in 9MFY11. According to MPOB (Malaysian Palm Oil Board), spot CPO price averaged RM3,129/tonne in 9MFY12. 

- Unlike other plantation companies, KLK’s FFB production did not fall as much. Due to KLK’s year-end, which is 30 September, the group recorded healthy production in 4Q2011 to cushion the 8% YoY fall in FFB output in 1H2012. 

- Also, the 1.9% YoY decline in KLK’s FFB production in 9MFY12 was not as sharp as its peers due to the robust double-digit growth in its FFB output in Indonesia. Indonesia is estimated to account for about a third of group FFB production.  

- Average age of KLK’s oil palm trees in Indonesia is about 7.7 years old compared with 14.4 years old in Sabah. As a group, the average age of KLK’s oil palm trees is roughly 10.2 years old.     

- Plantation (including refining) EBIT margin slid from 27.7% in 9MFY11 to 23.5% in 9MFY12 on the back of higher fertiliser and labour costs. 

- We believe that weak refining margins could have also contributed to the erosion in the EBIT margin of the plantation division. We estimate that refining accounts for 10%-13% of the division’s earnings

Source: AmeSecurites