klk, 3QFY08 RESULTS, A stunted 3Q

19 August 2008
UNDERPERFORM Maintained
RM11.90
Target: RM11.50
Mkt.Cap: RM12,703m/US$3,813m

Below expectations. 9MFY9/08 core net profit undershot expectations, making up only 67% of our full-year forecast and 72% of consensus. The shortfall came mainly from its plantation unit. Within expectations was the absence of a dividend for 3Q08.

Key surprises. The shortfall in plantation earnings in 3Q may have resulted from lower-than-expected CPO prices or higher operating costs in the form of rising fertiliser costs and export taxes. The group may have sold forward its CPO output at a lower price than our forecast. Another negative surprise was the one-offs in 3Q, including RM74.1m impairment of assets and goodwill for its subsidiary Davos Life Science Pte Ltd and RM53m additional writedown for an overseas quoted investment, Yule & Catto. These losses were tempered by an RM86.5m surplus arising from the sale of a 60% shareholding in KL-Kepong Cocoa Products in 3Q.

Higher CPO and rubber prices boost earnings. 3Q core net profit jumped 93% yoy as stronger plantation earnings offset weaker performances from its property and manufacturing divisions. Plantation EBIT shot up 109%, thanks to a 24% rise in FFB output as well as stronger CPO and rubber prices.

Cutting our earnings forecasts. We are pruning our FY08 net profit forecast by 12% as we cut our average CPO price assumptions by RM100 to RM2,900 per tonne for FY08 given the weak plantation earnings in 9M08 and also factor in lower manufacturing earnings. We now expect 4Q results to be weaker qoq as the lower selling prices offset seasonally higher FFB production. For FY09-10, our numbers are reduced by 6-8% to factor in higher operating costs.

Maintain UNDERPERFORM with lower target of RM11.50. While maintaining our basis of 10% discount to SOP, we trim our target price by 10 sen to RM11.50 to account for the lower value of the Yule Catto investment. There is no change to our UNDERPERFORM rating as we expect KL Kepong to continue to de-rate against the market due to concerns over softening CPO price. Other de-rating catalysts are a decline in crude oil price and rising operating costs.