Friday 23 November 2012

Kuala Lumpur Kepong: A Brighter 2013 in Store


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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