We are maintaining our BUY call on Kuala Lumpur Kepong (KLK) but are reducing our Fair Value to RM24.70. Although its earnings came in below expectations, the group’s operating cash flow surged 79.1%. We believe that palm oil price will strengthen next year in view of Malaysia’s lower export duty on CPO. KLK’s oleochemical business should also normalize when Indonesia’s new refining capacity rises next year. The company’s prospects should also get more upbeat in tandem with its expansion to Papua New Guinea.
Below expectations. KLK’s FY12 earnings were 19.8% below our forecast and 15.2% below consensus’. The improvement in plantation segment earnings was, however, insufficient to drive up the company’s overall earnings. Nevertheless, it was encouraging to note that KLK’s operating cash flow surged from RM928.2m in FY11 to RM1,663.5m this year. The company has cut its dividend to 65 sen per share compared with 85 sen in FY11. Although lower profitability is a factor, we also think that the group is conserving cash as it is about to embark on its expansion to Papua New Guinea.
Plantation earnings improve. Although realized crude palm oil (CPO) price has dipped 7.7% and rubber price was down by 9.9% q-o-q, plantation segment earnings surged 24.1% as fresh fruit bunch (FFB) production went up by 24.8% during the high crop quarter.
Manufacturing segment worsens. KLK’s manufacturing segment, which mainly entails oleochemicals, saw segment profit slipping 38.5% q-o-q. The profit decline was much sharper than the 7.4% drop in revenue. Management attributed this to inventory write-downs, which in turn was exacerbated by weaker CPO price. On y-o-y basis, the segment’s profit slid 17.1%, which we think is a direct result of Indonesia’s export duty structure. Hence, in 2013, when Indonesia’s new refining capacity comes on stream and result in refining margins normalising, KLK’s oleochemical business should also normalize.
Trimming forecast. We are reducing our net profit forecast for FY13 by 8.5% to RM1,590.9m to factor in a higher cost of production of RM1,300 per tonne compared with RM1,250 per tonne previously. This lowers our FV to RM24.70, based on 16x CY13 earnings. KLK remains a Buy.
FYE Sept (RMm)
|
FY10
|
FY11
|
FY12
|
FY13f
|
FY14f
|
Revenue
|
7490.6
|
10743.3
|
10067.2
|
11748.7
|
12606.9
|
Net Profit
|
901.9
|
1604.4
|
1007.9
|
1590.9
|
1822.2
|
% chg y-o-y
|
35.8
|
77.9
|
-37.2
|
57.8
|
14.5
|
Consensus
|
-
|
1382.0
|
1493.0
| ||
EPS
|
84.7
|
150.3
|
94.6
|
149.0
|
170.7
|
DPS
|
60.0
|
75.1
|
65.0
|
74.5
|
85.4
|
Dividend yield (%)
|
2.9
|
3.7
|
3.2
|
3.6
|
4.1
|
ROE (%)
|
15.0%
|
22.7%
|
14.2%
|
19.3%
|
19.9%
|
ROA (%)
|
9.8%
|
15.9%
|
9.0%
|
13.1%
|
13.3%
|
PER (x)
|
24.3
|
13.7
|
21.7
|
13.8
|
12.1
|
BV/share
|
5.63
|
6.63
|
6.65
|
7.73
|
8.57
|
P/BV (x)
|
3.7
|
3.1
|
3.1
|
2.7
|
2.4
|
EV/EBITDA (x)
|
17.1
|
10.8
|
9.5
|
Results Table (RMm)
FYE Sept
|
4Q12
|
3Q12
|
Q-o-Q
|
YTD
|
YTD
|
Y-o-Y
|
Comments
|
chg
|
FY12
|
FY11
|
chg
| ||||
Revenue
|
2419.6
|
2476.9
|
-2.3%
|
10067.2
|
10092.1
|
-0.2%
| |
EBIT
|
278.8
|
325.9
|
-14.5%
|
1383.4
|
2113.1
|
-34.5%
| |
Net interest expense
|
-6.0
|
-9.7
|
-38.0%
|
-40.2
|
-52.7
|
-23.7%
| |
Associates
|
2.9
|
1.1
|
165.5%
|
10.6
|
27.8
|
-62.0%
| |
PBT before EI
|
275.7
|
317.3
|
-13.1%
|
1353.7
|
2088.2
|
-35.2%
| |
EI
|
61.4
|
-1.3
|
nm
|
45.9
|
-40.4
|
nm
| |
PBT
|
337.1
|
316.0
|
6.7%
|
1399.6
|
2047.8
|
-31.7%
| |
Tax
|
-42.4
|
-70.9
|
-40.2%
|
-297.0
|
-415.5
|
-28.5%
| |
MI
|
-8.1
|
-8.2
|
-1.8%
|
-48.8
|
-74.1
|
-34.1%
| |
Net profit
|
286.6
|
236.9
|
21.0%
|
1053.8
|
1558.2
|
-32.4%
| |
Core net profit
|
225.2
|
238.2
|
-5.4%
|
1007.9
|
1598.6
|
-37.0%
| |
Core EPS (sen)
|
21.15
|
22.36
|
-5.4%
|
94.64
|
150.11
|
-37.0%
| |
DPS (sen)
|
50.0
|
0.0
|
65.0
|
85.0
| |||
EBIT margin
|
11.5%
|
13.2%
|
13.7%
|
20.9%
| |||
NTA/Share (RM)
|
6.39
|
6.08
|
6.39
|
6.33
| |||
Segmental breakdown
|
(includes discontinued operations)
| ||||||
Revenue
| |||||||
Plantation
|
1189.0
|
1140.1
|
4.3%
|
5052.4
|
5585.8
|
-9.5%
| |
Manufacturing
|
1212.3
|
1308.7
|
-7.4%
|
5060.0
|
5140.6
|
-1.6%
| |
Retailing
|
0.0
|
126.2
|
-100.0%
|
502.8
|
651.1
|
-22.8%
| |
Property development
|
58.9
|
48.2
|
22.1%
|
172.5
|
4.6
|
3660.2%
| |
Investmt hldg, others
|
44.8
|
35.6
|
25.8%
|
143.1
|
105.6
|
35.5%
| |
Inter-segment elimination
|
-85.3
|
-55.7
|
53.2%
|
-360.6
|
-744.5
|
-51.6%
| |
Total
|
2419.6
|
2603.2
|
-7.1%
|
10570.2
|
10743.3
|
-1.6%
| |
PBT
| |||||||
Plantation
|
272.2
|
219.4
|
24.1%
|
1178.8
|
1585.8
|
-25.7%
| |
Manufacturing
|
51.0
|
83.0
|
-38.5%
|
187.7
|
226.3
|
-17.1%
| |
Retailing
|
0.0
|
-2.8
|
nm
|
27.7
|
22.9
|
21.4%
| |
Property development
|
5.7
|
14.7
|
-61.4%
|
36.9
|
1.4
|
2629.8%
| |
Investmt hldg, others
|
3.8
|
10.6
|
-63.7%
|
39.5
|
46.9
|
-15.7%
| |
Corporate
|
142.0
|
-4.1
|
nm
|
117.9
|
208.3
|
-43.4%
| |
Finance cost
|
-32.3
|
-9.0
|
260.4%
|
-66.2
|
-74.2
|
-10.8%
| |
Associate
|
2.9
|
1.1
|
165.5%
|
10.6
|
27.8
|
-62.0%
| |
Total
|
445.3
|
312.9
|
42.3%
|
1533.0
|
2045.1
|
-25.0%
| |
Realised CPO price
|
2,778
|
3,010
|
-7.7%
|
2,829
|
2,958
|
-4.4%
| |
Realised rubber price
|
10.72
|
11.90
|
-9.9%
|
12.20
|
14.09
|
-13.4%
| |
FFB production
|
914,335
|
732,689
|
24.8%
|
3,257,985
|
3,288,972
|
-0.9%
| |
CPO production
|
198,029
|
159,714
|
24.0%
|
709,929
|
705,337
|
0.7%
| |
EARNINGS FORECASTS
FYE Sept (RMm)
|
FY10
|
FY11
|
FY12
|
FY13f
|
FY14f
|
Turnover
|
7490.6
|
10743.3
|
10067.2
|
11748.7
|
12606.9
|
EBITDA
|
1439.9
|
2180.0
|
1479.3
|
2355.7
|
2674.7
|
PBT
|
1272.4
|
2099.2
|
1353.7
|
2245.7
|
2572.3
|
Net Profit
|
901.9
|
1604.4
|
1007.9
|
1590.9
|
1822.2
|
EPS
|
84.7
|
150.3
|
94.6
|
149.0
|
170.7
|
DPS
|
60.0
|
75.1
|
65.0
|
74.5
|
85.4
|
Margin
| |||||
EBITDA (%)
|
19.2%
|
20.3%
|
14.7%
|
20.1%
|
21.2%
|
PBT (%)
|
17.0%
|
19.5%
|
13.4%
|
19.1%
|
20.4%
|
Net Profit (%)
|
12.0%
|
14.9%
|
10.0%
|
13.5%
|
14.5%
|
ROE (%)
|
15.0%
|
22.7%
|
14.2%
|
19.3%
|
19.9%
|
ROA (%)
|
9.8%
|
15.9%
|
9.0%
|
13.1%
|
13.3%
|
Balance Sheet
| |||||
Fixed Assets
|
5768.5
|
6192.4
|
6568.4
|
7090.7
|
7690.7
|
Current Assets
|
3395.1
|
4777.5
|
4814.8
|
5889.9
|
6651.8
|
Total Assets
|
9163.5
|
10969.9
|
11383.1
|
12980.6
|
14342.5
|
Current Liabilities
|
1269.7
|
2507.5
|
1579.8
|
3114.5
|
3563.1
|
Net Current Assets
|
2125.3
|
2269.9
|
3235.0
|
2775.4
|
3088.7
|
LT Liabilities
|
1568.5
|
1388.6
|
2295.8
|
3129.8
|
3418.5
|
Shareholders Funds
|
6005.2
|
7073.6
|
7109.8
|
8263.8
|
9177.0
|
Net Gearing (%)
|
7.2
|
5.9
|
1.7
|
Net cash
|
Net cash
|
Source: OSK
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