Investment Highlights

• We maintain HOLD on Kim Loong Resources (KLR) with a higher fair value of RM1.70/share vs. RM1.65/share previously. We raise KLR’s FY24F net profit by 4% to account for a stronger FFB production growth of 10% compared with 6% originally. Our fair value of RM1.70/share for KLR is based on a FY24F PE of 18x, which is the 5-year mean. We ascribe a 3-star ESG rating to KLR.

• We understand that although the weather has become drier in Johor and Sabah, there are still rains. Also in Sarawak, there are no major issues with weather.

• On 9 May, Australia’s Bureau of Meteorology predicted a 50% probability of an El Nino this year. On 11 May, the Climate Prediction Center in US estimated the probability to be more than 90% during the winter season. What is unclear is the strength of El Nino. While at least a weak El Nino is likely, the range of possibilities from November 2023 to January 2024 include an 80% chance of a moderate El Nino to a 55% chance of a strong El Nino.

• KLR received a group of 15 foreign workers in Johor a few months ago. KLR does not face a shortage of workers in its estates in Johor and Sabah. However, in Sarawak, there is a labour shortage of 10% to 20%.

• In spite of this, KLR’s FFB production growth is expected to be healthy in FY24F (FY23: 8.3%). We have assumed an FFB output growth of 10% in FY24F (1QFY24: 19.3% YoY), which is anticipated to be driven by an increase in mature areas.

• KLR’s all-in cost of production is envisaged to be RM2,000/tonne in FY24F compared with RM2,150/tonne in FY23. A higher volume of production and lower fertiliser costs are expected to lead to a drop in the cost of production per tonne in FY24F.

• KLR’s 2MW biogas plant in Keningau is expected to be commissioned soon. The group’s 1.5MW biogas plant in Telupid is anticipated to commence commercial operations in June. Upon commissioning, KLR would have 3 biogas plants in total, which would generate annual net profit of RM7mil to RM9mil. These account for 8-10% of group net profit in FY25F.

• In line with the decline in earnings, we forecast a lower gross DPS of 8.5 sen for KLR in FY24F vs. 15 sen in FY23. This implies a dividend payout of 88% (FY23: 89%) and yield of 4.8%. Free cash flows are forecast to be 20.4 sen in FY24F compared to 22.7 sen in FY23.

• KLR is currently trading at a FY24F fully diluted PE of 19x, which is higher than its 2-year average of 13x.

Source: AmInvest Research - 16 May 2023