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Author: MalaccaSecurities   |   Latest post: Wed, 22 Jan 2020, 9:24 AM

 

Kim Loong Resources Bhd - Output To Normalise

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Company Update

  • After a period of dullness, the plantation sector has gained traction in recent months following the rally in crude palm oil (CPO) prices. CPO prices advanced 27.0% year-to-date, hitting a one-year high of RM2,782 per tonne towards endNovember 2019. Moving forward, we reckon that the aforementioned rally will subside as production normalise moving into 2020.
  • As of 2QFY19, KLR continues to maintain a healthy tree age profile (see Appendix 1) that should sustain its earnings over the foreseeable future. The group currently has approximately 15,800 ha. of oil palm plantations in Sabah, Sarawak and Johor, of which close to 15,000 ha. are planted. Moving forward, the group will continue to roll out its replanting programme with approximately 1,000 ha. per annum to be replanted until 2026.
  • On the milling segment, KLR currently owns three mills at Kota Tinggi, Johor, Telupid and Keningau, Sabah with a combined processing capacity of 1.5 mln tonnes per annum. The group is also in the process of setting up three biogas power plant projects at its existing three mills for internal usage.
  • Going forward, we expect milling production to normalise following the resumption of its Kota Tinggi Mill operations that was affected by a fire incident in mid-2019.

We reckon that the acquisition of 2,000 ha. of Native Customary Rights (NCR) land will remain deadlocked as negotiations with land owners are still in progress. FFB production in FY20 is expected to come off to 280,000 tonnes due to the unexpected decline in production in 3Q2019 – in line with the slowdown in Malaysia planters that saw production falling to one-year low amid the recent dry spell and harvest disruption due to haze situation.

On the other hand, demand may taper moving into 2020 following the impending resumption of export duties in both Indonesia and Malaysia starting January 2020. The sharp uptick in deman, which led to the rising CPO prices, may also take a breather as overall production normalise. The

European Union (EU) remained committed to reduce the consumption of crude palm oil before phasing out in 2030 in view of the issues in the sustainability of planting programmes. Both Indonesia and Malaysia are seeking to counter the aforementioned move through the World Trade Organisation (WTO) on the discriminative treatment of palm oil and its derivative products. Moving into 2020, the trial implementation of 30% blended biodiesel (B30) programme in Indonesia, slated in December 2019, and the B20 bio diesel programme in Malaysia that will commence in several stages, is expected to fill the demand gap left by the EU.

Valuation and Recommendation

We continue to like KLR as one of the most efficient crude palm oil planter with a superior yield per ha. vs. Malaysia’s average over the past few years. We believe that the recent recovery of CPO prices will see some minor pullback, before ranging between RM2,400-RM2,500 per tonne in 1H2020 as the potentially rising demand in both Malaysia and Indonesia will absorb any recovery in production to maintain a stable stockpile level.

Although CPO prices has soared to one-year high and KLR’s share price has advanced 11.0% YTD, we leave our earnings forecast unchanged, pending the upcoming 3QFY19 results that is schedule to release by end of the month. Therefore, we maintain our HOLD recommendation on KLR, with an unchanged target price of RM1.15 as we ascribed an unchanged target PER of 14.0x to its FY21 EPS of 8.2 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x.

Risks to our recommendation include fluctuations in CPO prices. The volatility of CPO prices is subject to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.

Source: Mplus Research - 4 Dec 2019

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