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Author: MalaccaSecurities   |   Latest post: Mon, 1 Jun 2020, 1:16 PM

 

Kim Loong Resources Bhd - Tepid Production

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Results Review

  • Kim Loong’s 4QFY20 net profit sank 35.0% Y.o.Y to RM2.0 mln, dragged down by the lower production in the plantation and milling segment that offset the higher average selling prices (ASP) of fresh fruit bunches (FFB) and crude palm oil (CPO) in the palm oil mill segment. Revenue for the quarter declined 8.8% Y.o.Y to RM181.0 mln.
  • For FY20, cumulative net profit slipped 21.8% Y.o.Y to RM40.8 mln. Revenue for the year contracted 22.1% Y.o.Y to RM679.6 mln. The results came in below expectations with its net profit only amounting to 79.1% of our full-year forecast of RM51.5 mln, while its revenue came slightly below our expectations, amounting to 97.0% of our FY20 estimate of RM700.8 mln. The bottom line’s variance is due to the higher operational cost and effective tax rate.
  • Segment wise in 4QFY20, its plantation segment EBIT declined 2.7% Y.o.Y to RM8.9 mln on lower production. The milling operations segment’s EBIT sank 88.1% Y.o.Y to RM1.0 mln, dragged down by declined in CPO production due to the seasonally low yield cycle.
  • Despite the weaker-than-expected earnings, KLR continues to maintain a strong balance sheet, backed by with cash holdings of RM148.6 mln as oppose to a total borrowings of RM14.3 mln in 4QFY20.

Prospects

As of 4QFY20, KLR’s total planted area stood at 14,509 ha. across both Peninsular and East Malaysia. KLR continues to maintain a healthy tree profile (Immature: 11%, Young Mature: 6%, Prime Mature: 35%, Old Mature: 30% and Pre-replanting: 18%), of which approximately 71% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future. In the meantime, KLR has carried out its continuous replanting program with approximately 1400-ha. replanted in FY20 – in line with the group’s internal target of 1,000 ha. of annual replanting scheme until FY23.

In 4QFY20, KLR’s FFB production sank 44.0% Y.o.Y to 53,056 tonnes (see Appendix 1). Likewise, KLR’s CPO production declined 38.3% Y.o.Y to 55,353 tonnes (see Appendix 2) due to the seasonally low yiled cycle towards the end of the year. Palm Kernel production also decreased 38.9% Y.o.Y to 13,075 tonnes. In the meantime, KLR’s CPO extraction rate stood at 21.6% in FY20 – continues to outperform Malaysia’s average CPO extraction rate of 20.4% over the same period (see Appendix 3).

Moving into FY21, we see inventory level remain at the lower end against historical average amid the higher usage from the implementation of biodiesel mandates in Indonesia and Malaysia. This will cushion the decline from exports across other countries, particularly India and China stemmed from the Covid-19 breakout. At the same time, we see production to be tepid due to the recent Movement Control Order (MCO) initiated by the government over a period of one month as economic activities across the country comes to a standstill.

Valuation And Recommendation

As the reported earnings came below our expectations, we trimmed our net profit forecast by 13.6% and 12.0% to RM44.5 mln and RM45.4 mln for FY21 and FY22 respectively to account for the lower production, coupled with the potential slowdown in sales, before picking up towards the end of the year.

Although KLR’s share price has spiralled downwards for some 38.4% since the start of the year, we downgrade our recommendation to SELL (from HOLD) on KLR with lower target price of RM0.86 (down from RM1.41). Our target price is derived by ascribing an a lower target PER of 18.0x to its revised FY21 EPS of 4.8 sen. The ascribed target PER is in line with the industry average that rose to around 16.5x-19.5x.

We reckon that the CPO prices may trade in a volatile manner following OPEC and its’ allies disagreement to curb their production in the recent meeting. Nevertheless, the prospects of demand from the biodiesel mandate implementation from both Indonesia and Malaysia may provide some cushion the the CPO prices.

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 also 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 - 30 Mar 2020

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KMLOONG 1.17 +0.02 (1.74%) 21,700 

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