Investment Highlights

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

• Our forecasts are unchanged as KLR’s 1HFY23 net profit was within our full-year estimate, in which we expect KLR’s net profit to decline over the coming quarters due to weaker CPO prices.

• Comparing 1HFY23 against 1HFY22, KLR’s net profit grew by 38% to RM89mil in 1HFY23 on the back of higher palm product prices.

• Plantation division recorded an average CPO price of RM6,034/tonne in 1HFY23 vs. RM4,063/tonne in 1HFY22. The stronger CPO price helped compensate for a 2.2% YoY decline in FFB production in 1HFY23.

• Milling division’s pre-tax profit jumped by 53% YoY to RM56mil in 1HFY23. Pre-tax profit margin remained stable at 5.3%. After a weak 1QFY23, earnings of the milling division rebounded in 2QFY23 on the back of higher processing margin and FFB production.

• Plantation division accounted for 61% of KLR’s pre-tax profit in 1HFY23 while milling made up the balance 39%.

• Comparing 2QFY23 against 1QFY23, KLR’s net profit rose by 27% to RM50mil as milling earnings recovered. The 3x jump in milling pre-tax profit in 2QFY23 compensated for a 40% QoQ fall in plantation earnings.

• Plantation division was affected by lower CPO price and higher costs of labour and fertiliser in 2QFY23. Average CPO price realised slid by 8% to RM5,812/tonne in 2QFY22 from RM6,309/tonne in 1QFY23.

• Milling division’s pre-tax profit increased to RM45mil in 2QFY23 from RM11mil in 1QFY23. Pre-tax profit margin expanded to 8.1% in 2QFY23 from 2.2% in 1QFY23.

• KLR’s operating cash flows improved to RM160mil in 1HFY23 from RM102mil in 1HFY22 on the back of stronger palm product prices. Gross cash and short-term funds stood at RM480mil as of end-July.

• KLR is currently trading at a premium FY23F basic PE of 18x, which is above its 2-year average of 16x. However, dividend yields are attractive at 7%-9%.

Source: AmInvest Research - 29 Sept 2022