• Kim Loong’s 2QFY18 net profit jumped 61.6% Y.o.Y to RM27.5 mln, lifted by higher production and crude palm oil prices amid the recovery from the El-Nino weather phenomenon during 2015-2016. Revenue for the quarter gained 23.6% Y.o.Y to RM260.5 mln. For 1HFY18, cumulative net profit added 76.0% Y.o.Y to RM51.8 mln. Revenue for the period expanded 32.8% Y.o.Y to RM516.1 mln.

• The results were slightly above expectations with its revenue amounting to 56.4% of our full-year forecast of RM914.7 mln, while its net profit came in at 56.3% of our estimate of RM92.2 mln. The variance was mainly due to its higher topline growth, coupled with lower effective tax rate of 23.2% in 1HFY18 vs. 24.0% in our forecast.

• Meanwhile, Kim Loong’s 1HFY18 pretax profit surged 90.3% Y.o.Y to RM84.9 mln (pretax margins: 16.5%), on the back of higher contribution from both the plantation and milling segments, following the stronger FFB output and higher average selling prices. The recovery in production post El-Nino rolled over into 2QFY18 as Kim Loong’s FFB production increased 22.7% Y.o.Y to 82,494 tonnes, but tapered from 88,256 tonnes recorded in 1QFY18 (see Appendix 1). Nevertheless, its CPO production rose 23.8% Y.o.Y to 78,568 tonnes in 2QFY18 and added 13.4% Q.o.Q from 69,279 tonnes in 1QFY18 (see Appendix 2).

• As of 1HFY18, Kim Loong continues to maintain a lean balance sheet with a cash holding of RM302.3 mln as oppose to a total borrowings of RM29.9 mln. The group has also declared an interim single tier dividend of 9.0 sen per share, payable on 21st November 2017. This represents a 54.1% dividend pay-out ratio from its 1HFY18 net profit – above the group’s dividend policy of minimum 30% payout ratio.

Prospects

Going forward, we think that margins are likely to taper marginally owing to the seasonal factors that could lead to a potential decline in demand and in turn negatively affect the future average CPO prices.

As of 31 July 2017, KLR’s total planted area stood at approximately 14,920 ha. across both Peninsular and East Malaysia. Meanwhile, the group maintains a healthy mixture of tree profiles (Immature: 5%, Young Mature: 13%, Prime Mature: 28%, Old Mature: 48% and Pre-replanting: 6%). This implies that approximately 76% of the group’s production will continue to generate sustainable stream of earnings over the foreseeable future.

In the meantime, a total of 2,421 ha. of Native Customary Rights (NCR) land have been planted (rising from 2,419 ha. in FY17) as the group is gearing to obtain the acceptance from NCR owners for the remaining land. Upon completion of the acquisition exercise, KLR will own approximately 23,500 ha. of plantation land across Malaysia.

With average CPO prices finding stability above the RM2,400 per tonne level in 2QFY18, CPO prices now trades at an average RM2,654.49 per tonne in 1HFY18 – slightly above our estimates of RM2,600 for FY18. However, we expect CPO prices to taper towards 2HFY18 due to: (i) seasonal factors as China and Europe traditionally reduce their import in winter months, (ii) Malaysia government raises import tax for October 2017 to 6%, and (iii) slower production due to labour shortages.

Valuation And Recommendation

Despite the reported results coming in slightly above our estimates, we leave our earnings forecast unchanged as we reckon that the group’s 2HFY18 performance is likely to be softer due to seasonal factors. Therefore, we maintain our HOLD recommendation on KLR with an unchanged target price of RM4.15 as we arrive our target price by ascribing a PER of 14.0x to its FY18 EPS of 29.6 sen. The ascribed target PER is in line with the industry average of around 13.0x-15.0x as well as peer’s (midsized plantation companies) average of 15.1x.

At the target price of RM4.15, KLR will trade an implied PER of 13.5x and 13.3x for FY18 and FY19 respectively, which is fair, in our view, given the cyclical nature of the crude palm oil industry. A re-rating, however, is on the cards if crude palm oil prices were to trade above our estimates of RM2,600 and RM2,500 per tonne in FY17 and FY18 respectively.

Risks to our recommendation include fluctuations in the CPO prices. The volatility of CPO prices is subjected to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could affect CPO prices as both products are regarded as substitutes. Should the soybean price premium against the CPO price decline overtime, demand will shift to the former product and vice versa.

Source: Mplus Research - 29 Sept 2017