Investment Highlights

• We upgrade Kim Loong Resources (KLR) to BUY from HOLD with a higher fair value of RM2.20/share vs. RM1.70/share previously. In spite of weak palm product prices, KLR’s 1HFY24 results were decent. We raised KLR’s FY24F net profit by 26% and FY25F net earnings by 32% to account for higher milling pre-tax profit margin and stronger FFB production growth.

• Our fair value for KLR is based on a FY25F fully diluted PE of 18x, which is the 5-year mean. We ascribe a 3-star ESG rating to KLR.

• KLR’s annualised 1HFY24 results were 26% above our forecast and 17% above consensus. The group performed better-than-expected due to a robust increase in FFB production, expansion in milling pre-tax profit margin and lower-than-anticipated minority interest.

• KLR’s net profit declined by 15.8% YoY to RM74.9mil in 1HFY24, dragged by a fall in CPO prices and higher costs of production. Average CPO price slid by 35.2% to RM3,911/tonne in 1HFY24 from RM6,034/tonne in 1HFY23. On a positive note, FFB production jumped by 25.3% YoY in 1HFY24.

• Milling pre-tax profit was unchanged at RM56.2mil in 1HFY24. This partly compensated for a 31% YoY contraction in plantation profit in 1HFY24.

• In spite of weak palm product prices, milling earnings were flat due to higher processing charges. KLR raised the processing charge by RM15/tonne to a range of RM50/tonne to RM75/tonne in 2QFY23 due to increased costs of compliance and spare parts. The milling pre-tax profit margin rose to 8.1% in 1HFY24 from 5.3% in 1HFY23.

• Plantation accounted for 51% of KLR’s pre-tax profit in 1HFY24 while milling made up the balance 49%.

• Comparing 2QFY24 against 1QFY24, KLR’s net profit surged by 37.6% to RM43.4mil on the back of robust FFB production. FFB output expanded by 14% QoQ in 2QFY24. Average CPO price was RM3,799/tonne in 2QFY24 vs. RM4,050/tonne in 1QFY24.

• Milling pre-tax profit climbed by 58.6% QoQ to RM34.4mil in 2QFY24, underpinned by higher volume of FFB processed. Milling pre-tax profit margin was 9.1% in 2QFY24 compared to 6.8% in 1QFY24.

• KLR is currently trading at a FY25F fully diluted PE of 15x, which is lower than its 5-year average of 18x. We believe this is unjustified due to the group’s strong FFB output growth, which is above its peers.

Source: AmInvest Research - 29 Sept 2023