Investment Highlights

• We initiate coverage on Kim Loong Resources (KLR) with a HOLD recommendation on KLR and a fair value of RM2.05/share, as part of Bursa Malaysia’s RISE Scheme. We. Our fair value for KLR is based on FY24F fully diluted PE of 18x, which we use to value Hap Seng Plantations and TSH Resources. We ascribe a 3-star ESG rating to KLR.

• Although KLR is fundamentally sound, we reckon that the group would be affected by the decline in CPO prices in 2H2022. We estimate that KLR’s net profit would fall by 5% for every RM100/tonne decrease in CPO price.

• What differentiates KLR from other plantation companies is its high return on equity (ROE), which is underpinned by a high dividend payout of more than 60%. We forecast KLR’s ROE to be 22.6% in FY23F vs. 17.6% in FY22.

• KLR’s earnings are generated almost equally by the milling and plantation divisions. Depending on the level of CPO prices and availability of FFB supply, milling can be more profitable than the plantation unit.

• Pre-tax profit margin of KLR’s milling division was 5.8% in FY22 vs. the plantation unit’s 56.4%. Milling accounted for 44.5% of KLR’s pre-tax profit in FY22 while plantation made up a larger 55.5%.

• Most of KLR’s plantation earnings come from its oil palm estates in Sabah. As at end-January 2021, KLR had planted landbank of 15,500ha in Malaysia. Out of these, 11,918ha were in Sabah, 1,133ha in Johor and 2,449ha in Sarawak. Average age of KLR’s oil palm trees is 13 years old.

• KLR has strong free cash flows as its capex is low. The positive free cash flows allow the group to return a substantial amount of cash to shareholders every year. Dividend payouts ranged from 68% to 107% from FY18 to FY22.

• KLR has low capex requirements as most of its landbank has already been planted. Annual capex consists mainly of replanting and maintenance of housing and infrastructure. We forecast a capex of RM40mil in FY23F compared with RM99.1mil in FY22.

• KLR is currently trading at FYE1/24F PE of 17.0x vs. Hap Seng Plantations’ FYE12/23F PE of 22.7x and TSH Resources’ FYE12/23F PE of 17.8. KLR’s FYE1/24F dividend yield is forecast to be 6.2%.

Source: AmInvest Research - 18 May 2022