Kuala Lumpur Kepong Bhd
(Aug 19, RM16.96)
Maintain outperform at RM16.90 with revised fair value RM20.75 (from RM20.70): KLK’s 9MFY2009/10 core net profit was within expectations at 69% to 71% of our and consensus FY2010 core net profit forecasts.
KLK recorded approximately RM34.4 million in exceptional item (EI) gains in 9MFY2010 from writeback of provision in diminution in value for Yule Catto (3QFY10: RM1.9 million). We expect stronger numbers in the final quarter, given the higher CPO prices currently and as FFB production gears up towards peak harvest season.
Core net profit rose 36% year-on-year (y-o-y) on the back of a 10% rise in turnover in 9MFY2010. All divisions except the property division saw improvements in revenue, while the relatively larger rise in net profit was due to improved profit margins for the plantations, manufacturing and retail divisions, offset slightly by lower margins for the property division. Average CPO price achieved rose significantly (+2.1% quarter-on-quarter and 10% y-o-y) in 3QFY2010 to RM2,562/tonne, which is slightly higher than the average spot price of RM2,529/tonne for the quarter, while FFB production also improved by 8.7% q-o-q and 6.9% y-o-y. The retailing division recorded a notable turnaround to profitability in 3QFY2010, the first time in many years, as a result of lower expenses after the closure of some of its US stores.
Main risks include: (i) a convincing reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend; (ii) weather abnormalities resulting in an over or under supply of vegetable oils; (iii) revision in global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.
Our forecasts remain unchanged. We highlight that our forecasts have included the potential impact of a further restructuring loss for KLK’s retail division of approximately RM16.5 million in FY2010 for C&E US, although this may be unlikely given the operational improvement seen so far.
Despite our unchanged forecasts, we revise our sum-of-parts-based fair value for KLK up slightly to RM20.75 (from RM20.70), after taking into account the latest net debt figure. We continue to like KLK for its inexpensive valuations (as it remains the cheapest amongst the big-cap plantation stocks currently) and for its strong management with a good track record. Further catalysts could come from better than expected FFB production growth as well as sustainable return to profitability of the retail division. We maintain our “outperform” rating. — RHB Research Institute, Aug 19
This article appeared in The Edge Financial Daily, August 20, 2010.
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