Company Result 15 August 2018 Kuala Lumpur Kepong Fazed by unfavourable plantation segment

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1 MALAYSIA INVESTMENT RESEARCH REPORT JF APEX SECURITIES BERHAD (47680-X) Company Result 15 August 2018 Kuala Lumpur Kepong Fazed by unfavourable plantation segment HOLD Maintained Share Price Target Price RM24.68 RM24.73 Company Description KLK produces and processes palm products and natural rubber on its plantations. Stock Data Bursa / Bloomberg code 2445 / KLK MK Board / Sector Main / Plantation Syariah Compliant status Yes Issued shares (m) Par Value (RM) 1.00 Market cap. (RMm) week price Range RM Beta (against KLCI) m Average Daily Volume 1.22m 3-m Average Daily Value^ RM29.96m Share Performance 1m 3m 12m Absolute (%) Relative (%-pts) Major Shareholders % Batu Kawan Bhd EPF Skim Amanah Saham Bumiputera 5.34 Estimated Free Float Historical Chart Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Source: Bloomberg Low Zy Jing , ext. 754 zjlow@jfapex.com.my Result Kuala Lumpur Kepong (KLK) registered a net profit of RM141.9m in 3QFY18. After adjusting for foreign exchange gains, losses on derivatives and surplus of government acquisition of land, we derived a core net profit of RM154.8m, which inched down 0.9% qoq but improved 8.9% yoy. QoQ performance was mainly bogged down by low average selling prices (ASP) for CPO and Palm Kernel coupled with lower FFB production. Meanwhile, YoY performance was buoyed by manufacturing segment despite a lackluster performance in plantation segment. Below expectations. The Group s 9MFY18 core net profit of RM608.8m below ours and consensus expectation, only matching 55.2% and 60.8% of the full year net earnings forecasts. The unfavourable earnings was a result of further deterioration in plantation margin in view of weak ASP. Comment Plantation QoQ and YoY performance was eroded by lower ASP and contraction in margin. Plantation 3QFY18 s revenue down 11.6% qoq and 28.2% yoy to RM17215m. Similarly, operating profit tumbled 26.3% qoq and 41.7 yoy. The lackluster performance was a result of lower ASP for CPO (RM2302: -4% qoq and -13.9% yoy) and Palm Kernel (RM1695: -18.3% qoq and -23.3% yoy) and contraction in operating margin (-1.6 pts qoq and -1.8 pts yoy). Nevertheless, QoQ performance was further dragged down by lower FFB production (-3.4% qoq). However, YoY performance was slightly mitigated by higher FFB production (+0.5% yoy). On the same note, plantation segment 9MFY18 s operating profit slumped 42% yoy. Plantation segment 9MFY18 s revenue and operating profit down 23.8% yoy and 42% yoy respectively. The unfavourable performance was due to lower ASP for CPO (RM2428: -13.1% yoy) and Palm kernel (RM2094: -21.4% yoy) which outweighed higher FFB production (+1.2% yoy). Nevertheless, slide in margin (-3.0 pts yoy) further compounded the effect. Manufacturing segment enjoying stable feedstocks price (Crude Palm Kernel Oil) with a better YoY performance. However, QoQ performance was bogged down by unrealized loss arose from change in fair value of outstanding derivatives contracts. 3QFY18 registered operating profit of RM99.4m as compared to loss of RM5.1m in 3QFY17 in view of lower Please read carefully the important disclosures at end of this publication

2 feedstocks price. Meanwhile, 3QFY18 s operating profit slid 21.1% qoq, after adjusting for unrealized losses of fair value change in derivatives contracts (RM50.8m) in 3QFY18 and gains (RM21.3m) in 2QFY18. 3QFY18 s operating profit surged 43.5% qoq. The better performance was mainly attributed to favuorable operating margin with reduced cost of raw materials. Nevertheless, manufacturing 9MFY18 s operating profit (+276.1% yoy) boosted by higher sales volume and low material costs. Revenue improved 4.4% to RM7692.6m. Similarly, operating profit elevated to RM379.9m, thanks to low material costs. As such, manufacturing segment enjoyed a better margin of 4.9% (+3.5 pts yoy). Looking forward, the group expects its plantation segment profit to be lower in view of prevailing weak CPO selling price. However, higher capacities utilization and operational efficiencies in Oleochemical operations should partly mitigate the impact. Earnings Outlook/Revision We tweak down our earnings forecast for FY18F and FY19F by 17% and 4% respectively to account for margin contraction in the plantation segment. Valuation & Recommendation Maintain HOLD with a lower target price of RM24.73 (RM25.67 previously) following our earnings cut. We peg our valuation at 23x FY19F EPS. We maintain our neutral stance on the Group due to its pricey valuation. On the fundamental, we opine that KLK s outlook remains positive given its stable growth rate in FFB production. Figure 1: Quarterly Figures Revenue % % % Operating Profit % % % Pre-tax Profit % % % Profit After Tax % % % PATAMI % % % Core Net Profit % % % Operating Margin (%) 6.1% 6.6% -0.4% 5.2% 0.9% 7.2% 8.1% -0.8% Profit Before Tax Margin (%) 5.0% 6.2% -1.2% 4.1% 0.9% 6.7% 7.2% -0.5% Core Net Profit Margin (%) 3.6% 3.3% 0.2% 2.9% 0.7% 4.3% 5.4% -1.1% 2

3 Figure 2: Segmental Breakdown Segment Revenue Plantations % % % Manufacturing % % % Property Development % % % Investment Holding/Others % % % Total Revenue % % % Segment Operating Profit Plantations % % % Manufacturing % -5.1 N.A % Property Development % % % Investment Holding/Others % % % Total Operating Profit % % % Figure 3: Operational Figures Year to 30 Sept 3QFY18 2QFY18 QoQ YoY YoY 3QFY17 9MFY18 9MFY17 % chg % chg % chg FFB (MT) 925, , % 920, % 2,908,508 2,873, % CPO (MT) 197, , % 199, % 630, , % Palm Kernel (MT) 39,197 42, % 38, % 126, , % Rubber (Kg) 1,605,406 2,693, % 2,112, % 7,455,107 9,826, % Operational Crude Palm Oil (RM/mt ex-mill) % % % Palm Kernel (RM/mt ex-mill) % % % 3

4 Figure 4: Financial Summary FYE 30 Sept F 2019F Revenue (RM'm) EBIT (RM'm) Core Net Profit (RM'm) EBIT Margin 13.6% 12.5% 8.3% 7.8% 0.0% 6.7% 8.7% Net Profit Margin 10.6% 9.3% 6.5% 6.5% 5.2% 4.7% 6.2% EPS (RM) P/E (x) P/Book (x) EV/EBITDA (x) Div Yield 2.2% 2.9% 2.1% 2.1% 2.0% 1.7% 2.4% ROE 12.2% 12.8% 9.0% 9.5% 8.7% 6.6% 8.9% ROA 7.8% 7.7% 5.0% 5.8% 5.5% 4.1% 5.6% Net debt to equity 7.3% 19.7% 24.8% 22.5% 19.3% 21.3% 20.1% 4

5 JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah Kajang Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) DEALING TEAM Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team: Zairul Azman (ext 746) Fathul Rahman Buyong (ext 741) Ahmad Mansor (ext 744) PJ Office: Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111) RESEARCH TEAM Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Low Zy Jing (ext 754) Nursuhaiza binti Hashim (ext 752) Siao Li Shen (ext 753) JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY : The stock s total returns* are expected to exceed 10% within the next 12 months. HOLD : The stock s total returns* are expected to be within +10% to 10% within the next 12 months. SELL : The stock s total returns* are expected to be below -10% within the next 12 months. TRADING BUY : The stock s total returns* are expected to exceed 10% within the next 3 months. TRADING SELL : The stock s total returns* are expected to be below -10% within the next 3 months. SECTOR RECOMMENDATIONS OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months. MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to 10% within the next 12 months. UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months. *capital gain + dividend yield JF APEX SECURITIES BERHAD DISCLAIMER Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad. Published & Printed By: JF Apex Securities Berhad (47680-X) (A Participating Organisation of Bursa Malaysia Securities Berhad) 5