Kuala Lumpur Kepong - Lower refining profits? Buy

- Maintain BUY on Kuala Lumpur Kepong Bhd (KLK) with a lower fair value of RM23.15/share. Although KLK’s earnings were below expectations, we reckon that KLK is a proxy to the improvement in CPO prices. 

- KLK’s annualised 1QFY13 core net profit was below our forecast and consensus expectations as the average CPO price realised in 1QFY13 was still below market’s assumption of about RM2,800/tonne. 

- We also believe that KLK’s refining profits could have been lower in 1QFY13 compared with 1QFY12. Refining is estimated to account for about 20% to 25% of the plantation division’s earnings. 

- As a result, plantation EBIT fell 30.8% YoY to RM269.1mil in 1QFY13. However on a QoQ basis, core plantation earnings (after stripping out fair value changes in derivative contracts) rose about 6.4% to RM276.8mil in 1QFY13.  

- Although KLK’s average CPO price realised declined 13% in 1QFY13 versus 1QFY12, we reckon that the negative impact should have been compensated by the 20% expansion in FFB production YoY. In its results announcement, KLK also said that production cost was lower in 1QFY13 against 1QFY12. 

- KLK realised an average CPO price of RM2,395/tonne in 1QFY13 versus RM2,753/tonne in 1QFY12 and RM2,778/tonne in 4QFY12.  

- EBIT margin of the plantation division slid to 23.1% in 1QFY13 from 26.8% in 1QFY12. On a quarterly basis, KLK’s plantation EBIT margin of 23.1% in 1QFY13 was higher than the margin of 22.9% recorded in 4QFY12.    

- Manufacturing earnings have recovered on the back of improved sales volume and margins. We believe that the profit driver was the oleochemical operations in Malaysia.

- Manufacturing EBIT expanded 30.4% QoQ and 137.1% YoY to RM66.6mil in 1QFY13. Manufacturing EBIT margin was at 6.0% in 1QFY13 versus 4.2% in 4QFY12 and 0.4% in 1QFY12. 

- Property earnings climbed from RM5.7mil in 4QFY12 and RM6.1mil in 1QFY12 to RM19.0mil in 1QFY13. The improvement in property earnings was due to higher sales from the Bandar Sri Coalfields property development project.   

Source: AmeSecurities