Kuala Lumpur Kepong Bhd (Nov 15, RM23.70)
Maintain buy with an unchanged target price of RM27.38: Kuala Lumpur Kepong Bhd (KLK) is expected to release its fourth quarter financial year 2016 (4QFY16) results today. We expect its core net income (CNI) to be in the range of RM330 million to RM350 million.
Plantation division earnings should improve quarter-on-quarter (q-o-q) but stay flattish year-on-year (y-o-y). The q-o-q improvement is mainly driven by higher crude palm oil (CPO) prices (+28% q-o-q to RM2,631/tonne based on Malaysian Palm Oil Board data) and fresh fruit bunch (FFB) production (+16% q-o-q to 897,952 tonnes).
Against the same quarter last year, we expect flattish profit. We estimate that the 1% increase in CPO prices y-o-y and 86% surge in palm kernel prices will be offset by lower FFB production (-14% y-o-y). Similar to other planters, KLK estates have been affected by El Nino, causing extreme dryness in and stress to their trees. To recap, the plantation division is the biggest earnings contributor to KLK with an operating profit of RM605 million (or 59% of the group’s) in the first nine months of FY16 (9MFY16).
We expect KLK’s manufacturing division revenue to register double-digit growth due to higher sales volumes in Europe and China. We believe this is likely caused by increased capacities from key plant expansions. Note that the manufacturing division is a significant earnings contributor with an operating profit of RM365 million (or 36% of the group’s) in 9MFY16.
Property-division earnings should decline, but the impact is minimal. Due to the slowdown in the property market, we believe property-division revenue is likely to decline q-o-q and y-o-y. Having said that, we are not overly concerned as the property division contributed only an operating profit of RM49 million (or 5% of the group’s) in 9MFY16. — MIDF Research, Nov 15
This article first appeared in The Edge Financial Daily, on Nov 16, 2016. Subscribe to The Edge Financial Daily here.