TA retains 'sell' on Kwantas despite 3Q profit jump

Business & Markets 2013
Written by Kamarul Anwar of theedgemalaysia.com
Wednesday, 29 May 2013 13:31
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KUALA LUMPUR (May 29): Kwantas Corp Bhd’s ability to increase its
third quarter net profit by 518% from a year earlier did not prompt TA
Securities to change its “sell” rating on the palm oil producer.
However, the research house raised its target price for Kwantas to
RM2.07 from RM1.86.
As at noon break, Kwantas shares were untraded. It previously closed
at RM2.10.
In a note today, TA analyst James Ratnam said the research house’s
decision to keep the “sell” rating was due to a lack of a “convincing
catalyst to upgrade the stock recommendation.”
“Earnings visibility remains a major concern. A convincing turnaround in
the oleochemical segment is a key re-rating drive, in our view,” said
James in the note.
He said Kwantas’s net profit for its third quarter ended March 31, 2013
(3QFY13) of RM13.6 million did come in at the higher end of TA’s
expectations. In the previous corresponding period, Kwantas drew
RM2.2 million in profit.
James explained that the year-on-year surge in net profit was due to
significantly reduced losses in the oleochemical segment to RM1.9
million compared to the previous corresponding period’s RM13.9 million
in 3QFY12.
For the cumulative year (9MFY13), Kwantas’s oleochemical segment’s operating loss narrowed to RM5.8 million from
RM18.9 million in operating loss a year earlier.
“While operating loss has commendably narrowed, we note that other PLANTATION [] companies that have released their
first quarter calendar year’s results so far, including IOI Corp Bhd, KUALA LUMPUR KEPONG BHD [] and Wilmar
International Ltd, reported substantial increase in oleochemical margin and profits.
“We suspect the divergence could be partly attributable to low capacity utilisation rate. Still, on a broader perspective, it
implies that a full recovery in the oleochemical business, as far as Kwantas is concerned, has yet to fully materialise,” said
TA’s James.
On Kwantas’s outlook, he said the company’s palm oil processing margin is expected to remain fairly good in line with the
attractive feedstock price and increase in demand.
He said the company’s processing margin in China, meanwhile, has narrowed.
“We expect the impact to be reflected in 4QFY13 earnings.”
As for Kwantas’s oleochemical business, James said: “While we acknowledge the upside risk, we maintain a conservative
view on the oleochemical business’s outlook.”