Investment Highlights

• We maintain HOLD on Kim Loong Resources (KLR) with a lower fair value of RM1.65/share vs. RM2.05/share previously. Our fair value for KLR is based on an unchanged FY24F fully diluted PE of 18x. We ascribe a 3- star ESG rating to KLR.

• We have reduced KLR’s FY24F net profit by 20% to account for a lower gross profit margin resulting from increased costs of wages and fertiliser. We expect KLR’s ex-mill cost of CPO production to exceed RM2,000/tonne in FY24F vs. RM1,800/tonne in FY23F.

• KLR’s 1QFY23 net profit was 15% below our forecast. We reduce KLR’s FY23F net profit by 15.5% to reflect a lower gross profit margin 15.5% vs. 18% previously.

• KLR’s milling division suffered an erosion in pre-tax profit margin in 1QFY23 due to a drop in the oil extraction rate (OER). The quality of FFB purchased from external parties was poor in 1QFY23 as there was excessive rainfall in Johor.

• Pre-tax profit margin of the milling division inched down to 2.2% in 1QFY23 from 4.6% in 1QFY22. The milling unit’s pre-tax profit slid by 19.9% to RM11.1mil in 1QFY23 from RM13.9mil in 1QFY22.

• Comparing 1QFY23 against 1QFY22, KLR’s net profit climbed by 38.2% to RM39.2mil underpinned mainly by a 58.1% surge in average CPO price and 7% increase in FFB production. Plantation accounted for 82.9% of KLR’s pretax profit in 1QFY23 while milling made up the balance 17.1%.

• KLR’s plantation division registered a pre-tax profit margin of 69.9% in 1QFY23 compared with 65.9% in 1QFY22. KLR recorded an average CPO price of RM6,309/tonne in 1QFY23 vs. RM3,991/tonne in 1QFY22.

• KLR’s operating cash flows improved to RM62mil in 1QFY23 from RM30.7mil in 1QFY22 on the back of higher palm product prices. KLR’s gross cash and short term funds stood at a high RM410.5mil as of 30 April.

Source: AmInvest Research - 29 Jun 2022