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 an unchanged 3 star ESG rating to KLR.

• We forecast an FFB production growth of 6% for KLR in FY23F (FY22: -4.2%). Although KLR’s FFB production was flat YoY in 7MFY23, we believe that output would improve over the coming months due to seasonal factors. We think that KLR’s FFB production would reach its highest level in October or November.

• Although the weather has been very wet in Sarawak, the impact on KLR’s FFB production is not expected to be significant. We believe that more than half of the group’s earnings are generated by its upstream and milling operations in Johor and Sabah.

• KLR is currently facing a labour shortage of 10% to 20%. The group is in the process of recruiting foreign workers mainly from Indonesia. We understand that KLR’s labour shortage is more acute in its estates in Peninsular Malaysia and Sarawak compared with Sabah.

• We believe that KLR’s all-in cost of production could increase to RM2,300/tonne in FY23F from RM1,670/tonne in FY22. Fertiliser costs are expected to double in FY23F. As for wages, we reckon that the impact of higher minimum wage would not be material. Most of KLR’s workers are paid higher than the minimum wage of RM1,500/month.

• We have assumed a lower FY23F capex of RM40mil compared with RM100mil in FY22 as KLR is in the tail-end of completing its biogas plants in Keningau and Telupid. We estimate that earnings from 2 biogas plants would contribute about 5% to 10% to KLR’s FY24F net profit.

• KLR’s dividend pay-outs are envisaged to be high on the back of healthy free cash flows. As such, we forecast a gross DPS of 15 sen in FY23F (FY22: 14 sen), which translates into a pay-out of 97%. As a guide, KLR’s dividend pay-outs ranged from 68% to 99% from FY18 to FY22.

• KLR is currently trading at a premium fully diluted FY24F PE of 18x, which is higher than its 2-year average of 16x, while offering an attractive dividend yields of 7%-9%.

Source: AmInvest Research - 4 Oct 2022