Stock Focus KLK’s oleochemical operations seen difficult to sustain despite strong earnings growth

by **Cals** Fri 23 May 2014, 00:13

Stock Focus KLK’s oleochemical operations seen difficult to sustain despite strong earnings growth

Business & Markets 2014

Written by Jeffrey Tan of theedgemalaysia.com

Thursday, 22 May 2014 12:10

KUALA LUMPUR (May 22): Kuala Lumpur Kepong Bhd’s (KLK) oleochemical operations may see difficulty sustaining its strong earnings growth in the second half this year, due to higher feedstock costs and rising competition, analysts said.
Yesterday, KLK posted core net profit jumped 31% to RM611 million due to good performance of its downstream division, apart from its plantation division.
The robust earnings growth in KLK’s downstream division came on higher sales volume of fatty acids and specialties products, favourable fatty alcohol business and improved contribution from European operations.
At 11.47 am today, KLK lost 6 sen or 0.2% to RM24.64 on 156,800 shares done. It had earlier fallen to a low of RM24.36.
CIMB Investment Bank Research’s analyst Ivy Ng Lee Fang said: “We believe that KLK will have difficulty sustaining the strong performance in the second half due to higher feedstock costs and rising competition.”
This is despite Ng’s recognition of KLK’s improvement in its oleochemical facilities, she said in her note today.
“We believe the market has priced in KLK’s favourable long-term prospects as the stock is trading above its historical five-year average price earnings ratio of 20 times,” she said.
As such, Ng said she maintained her ‘reduce’ call on KLK with an unchanged target price (TP) of RM22.50, but nudged up marginally her FY14 earnings per share by 1%.
She added KLK’s core net profit was broadly in line, at 54% of her full-year forecast and 49% of consensus numbers.
Meanwhile, Kenanga Research said management has guided for improved profit in FY14 against FY13, in line with its forecast of 42% earnings growth to RM1.3 billion in FY14E.
“We believe the 31% core net profit growth in the first half this year will provide the short-term positive catalyst for the stock,” said analyst Alan Lim Seong Chun of Kenanga.
Lim said he upgraded TP to RM27.00 from RM26.10, and maintained an ‘outperform’ call for the stock.