MALAYSIA INVESTMENT RESEARCH REPORT JF APEX SECURITIES BERHAD (47680-X) Company Result 23 November 2017 Kuala Lumpur Kepong Buoyed by Plantation Segment HOLD Maintained Share Price Target Price RM24.50 RM25.50 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) 1064.97 Par Value (RM) 1.00 Market cap. (RMm) 26091.66 52-week price Range RM23.00 25.50 Beta (against KLCI) 0.78 3-m Average Daily Volume 1.30m 3-m Average Daily Value^ RM31.99m Share Performance 1m 3m 12m Absolute (%) 0.4-0.2 3.2 Relative (%-pts) 1.5 3.3-2.4 Major Shareholders % Batu Kawan Bhd 47.03 EPF 11.72 Lembaga Kemajuan Tanah 4.28 Estimated Free Float 30.12 Historical Chart 25.50 25.00 24.50 24.00 23.50 23.00 22.50 22.00 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Source: Bloomberg Low Zy Jing 03-87361118, ext. 754 zjlow@jfapex.com.my Result Kuala Lumpur Kepong (KLK) registered a net profit of RM242.1m in 4QFY17. After adjusting for foreign exchange gains, loss on derivatives, impairment for available-for-sale investments and impairment of property, plant and equipment, we derived a core net profit of RM285.7m, which doubled qoq but slid 36% yoy. The stellar performance on qoq was lifted by growth in both plantation and manufacturing segments. Meanwhile, the lackluster yoy performance was mainly attributed to a tax expense of RM115m in current quarter as compared a tax expense of RM115m in current quarter. Cumulatively, 12MFY17 s core net profit was little changed (-0.4% yoy) despite a tax gains in 3QFY16 given a strong growth in plantation segment. Within expectation. The Group s 12MFY17 core net profit of RM1082.3m was broadly in line with our and consensus expectation, matching 96.7% and 97% of the full year net earnings forecasts. Comment Higher FFB production outweighed a retreat in CPO average selling price (ASP) in 4QFY17. Plantation segment s 4QFY17 operating profit up 24.1% qoq, backed by higher FFB production (+8.6%) despite lower CPO (- 4.5% qoq) and Palm Kernel (-2.2% qoq) ASP. Meanwhile, 4QFY17 operating profit up 30.1% yoy given higher FFB production (+11.3%) and CPO ASP (+2.3% yoy) which outweighed a slide in Palm kernel ASP (-8.5% yoy). Cumulatively, higher FFB production (+10.8% yoy) coupled with higher ASP (CPO +20.5% yoy; Palm kernel +34.7% yoy) boosted 12MFY17 plantation performance with operating profit increased by 58.1% yoy to RM1307m. Manufacturing division turned profitable with better sales volume and improved margins in 4QFY17. However, 12MFY17 s performance bogged down by high feedstocks prices. Manufacturing segment posted a revenue of RM2556.7m in 4QFY17, which improved 6.6% qoq and 16.0% yoy. After removed one-offs, 4QFY17 Manufacturing s operating profit up 170.1% qoq and 42.2% yoy given lower feedstocks prices. Meanwhile, 12MFY17 Manufacturing s revenue increased by 28.2% yoy to RM9923m but operating profit dropped by 45% yoy (after adjusting for one-offs) given hike in feedstocks prices. Looking forward, the group expects plantation segment to contribute higher profit and strives to turn around manufacturing segment despite the industry is flush with excess capacities. Higher Please read carefully the important disclosures at end of this publication
plantation profit is underpinned by the current CPO price coupled with higher FFB production. Proposed final single-tier dividend of 35sen per share with Ex-date on 19 Feb 2018. As such, total dividend for FY17 amounts to 50sen per share which translates into a dividend yield of 2%. Earnings Outlook/Revision We maintain our earnings forecast for FY18F and introduce earnings forecast for FY19F with a flattish yoy growth. Valuation & Recommendation Maintain HOLD with an unchanged target price of RM25.50. We derived our valuation based on 23x FY18F EPS. We maintain our neutral stance on the Group due to its pricey valuation as we believe current share price has factored in the positive outlook of CPO price. On the fundamental, we opine that KLK s outlook remains favourable given its stable growth rate in FFB production. Figure 1: Quarterly Figures (RMm) (RMm) % chg (RMm) % chg (RMm) (RMm) % chg Revenue 5163.8 4873.2 6.0% 4543.0 13.7% 21004.0 16505.8 27.3% Operating Profit 406.9 254.0 60.2% 257.8 57.9% 1610.7 1283.6 25.5% Pre-tax Profit 380.8 201.4 89.0% 244.0 56.1% 1450.2 1712.3-15.3% Profit After Tax 265.8 121.8 118.2% 401.8-33.8% 1066.9 1683.1-36.6% PATAMI 242.1 112.8 114.7% 375.1-35.4% 1005.1 1592.2-36.9% Core Net Profit 285.7 142.2 100.9% 446.5-36.0% 1082.3 1086.2-0.4% Operating Margin (%) 7.9% 5.2% 2.7% 5.7% 2.2% 7.7% 7.8% -0.1% Profit Before Tax Margin (%) 7.4% 4.1% 3.2% 5.4% 2.0% 6.9% 10.4% -3.5% Core Net Profit Margin (%) 5.5% 2.9% 2.6% 9.8% -4.3% 5.2% 6.6% -1.4% 2
Figure 2: Segmental Breakdown (RMm) (RMm) % chg (RMm) % chg (RMm) (RMm) % chg Segment Revenue Plantations 2517.0 2397.8 5.0% 2272.2 10.8% 10668.6 8455.1 26.2% Manufacturing 2556.7 2397.6 6.6% 2170.8 17.8% 9923.7 7738.8 28.2% Property Development 44.4 14.0 217.0% 60.6-26.7% 141.5 110.7 27.8% Investment Holding/Others 45.7 63.8-28.4% 39.4 16.0% 270.2 201.2 34.3% Total Revenue 5469.9 5497.1-0.5% 3702.6 47.7% 21004.0 8040.4 161.2% Segment Operating Profit Plantations 289.0 232.8 24.1% 222.1 30.1% 1307.7 827.3 58.1% Manufacturing 92.4-5.1-1924.0% 5.5 1581.3% 193.4 370.6-47.8% Property Development 21.2 1.6 1237.5% 18.5 14% 39.1 25.2 54.9% Investment Holding/Others 4.4 24.7-82.2% 11.7-62.4% 70.5 60.5 16.6% Total Operating Profit 429.1 520.6-17.6% 257.8 66.5% 1610.7 674.3 138.9% Figure 3: Operational Figures % chg % chg % chg FFB (MT) 999,839 920,876 8.6% 897,952 11.3% 3,873,804 3,495,931 10.8% CPO (MT) 218,625 199,098 9.8% 199,752 9.4% 843,771 788,803 7.0% Palm Kernel (MT) 42,455 38,635 9.9% 38,823 9.4% 165,135 155,395 6.3% Rubber (Kg) 3,148,936 2,112,281 49.1% 4,743,766-33.6% 12,975,157 16,019,302-19.0% (RMm) (RMm) % chg (RMm) % chg (RMm) (RMm) % chg Operational Crude Palm Oil (RM/mt ex-mill) 2555 2999-14.8% 2497 2.3% 2735.0 2270.0 20.5% Palm Kernel (RM/mt ex-mill) 2162 3111-30.5% 2364-8.5% 2534.0 1881.0 34.7% 3
Figure 4: Financial Summary FYE 30 Sept 2013 2014 2015 2016 2017 2018F 2019F Revenue (RM'm) 9147 11130 13650 16506 21004 17704 18529 EBIT (RM'm) 1241 1395.2 1134.3 1283.6 1610.7 1649.5 1662 Core Net Profit (RM'm) 967 1032.7 884.04 1067.1 1082.3 1185.3 1191 EBIT Margin 13.6% 12.5% 8.3% 7.8% 0.0% 9.3% 9.0% Net Profit Margin 10.6% 9.3% 6.5% 6.5% 5.2% 6.7% 6.4% EPS (RM) 0.86 0.93 0.82 1.00 1.01 1.11 1.12 P/E (x) 26.2 22.6 26.6 23.9 24.2 22.1 22.0 P/Book (x) 3.0 2.7 2.3 2.3 2.1 2.1 2.0 EV/EBITDA (x) 17.8 15.1 18.8 17.4 14.7 14.7 14.7 Div Yield 2.2% 2.9% 2.1% 2.1% 2.0% 2.5% 2.5% ROE 12.2% 12.8% 9.0% 9.5% 8.7% 9.5% 9.1% ROA 7.8% 7.7% 5.0% 5.8% 5.5% 5.9% 5.8% Net debt to equity 7.3% 19.7% 24.8% 22.5% 19.3% 21.3% 19.7% 4
JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah 43000 Kajang Selangor Darul Ehsan Malaysia General Line: (603) 8736 1118 Facsimile: (603) 8737 4532 PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin 46050 Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) 7620 1118 Facsimile: (603) 7620 6388 DEALING TEAM Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team: Fathul Rahman Buyong (ext 741) Ahmad Mansor (ext 744) Zairul Azman (ext 746) 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