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KL Kepong
1QFY11 : Downgrade to Hold
· Above expectations
Adjusted (for a RM95.3m fair value gain from the adoption of FRS130) 1QFY11 net profit made up 37% of our estimates and 30% of street estimates. For the quarter the group achieve a CPO ASP of RM2,678/mt (MPOB average of RM3,268/mt). The group’s plantation earnings were flat q-o-q despite the lower CPO ASP achieved in 4QFY10 (see Figure 2) as there was a decline in production over 1QFY11. On the flipside, what outperformed our expectations this quarter was the manufacturing segment. Adding back the RM50.2m fair value losses, the manufacturing segment turned in an operating profit that was 173% higher q-o-q due to lower feedstock cost coupled with higher selling prices of refined product.
· 5-6% FFB growth expectations for FY11
During a recent visit to KLK, they said that they expected FFB growth of 5-6% this year. This would be driven by new maturities in Indonesia of 6,000ha. Just as a comparison, KLK’s latest matured hectarage amounts to 141,819ha. Also, total immatured hectarage that the group has amounts to 38,732ha and they continue to plant some 10,000ha per
annum. Our estimates stated in Figure 5.
· Adjusting estimates upwards
We are upping our margin expectations for the oleochemical segment to 7% from 5% given the low feedstock higher selling price effect that will be seen over 1HFY11. Besides this, we are bringing up our CPO ASP for FY11 from RM2,700/mt to RM2,950/mt for the year given that the group would have sold forward at least 3 months at prices of >RM3,500/mt. FY12 and FY13 are upped slightly from increases in FFB yields in Indonesia. (Figure 6 for earnings revisions)
· But downgrading to Hold on lower CPO price outlook
Following our recent sector downgrade to Neutral (from Overweight), we are also downgrading our call on KLK from Trading Buy to Hold. Previously, our premise of pegging FY11 EPS to their +1 std dev PE of 22.4x was that during a period of rising CPO prices, KLK would be able to re-rate, as it did during the 2007 CPO rally. However, considering that we
now see potential for CPO prices to correct further due an expected turnaround in Malaysian production and recovering soybean supplies, this hypothesis can no longer hold true. As such, we will be pegging FY11 EPS to their long term average 1-year rolling forward P/E of 17.1x (see Figure 7). This derives a TP of RM19.80 (RM21.70 previously).
