Results Review

• Kim Loong Resources’ (KLR) 3QFY18 net profit added 11.2% Y.o.Y to RM27.9 mln, buoyed by higher production and average crude palm oil prices amid the recovery from the El-Nino weather phenomenon during 2015-2016. Revenue for the quarter grew 16.7% Y.o.Y to RM289.4 mln. For 9MFY18, cumulative net profit increased 46.2% Y.o.Y to RM79.8 mln. Revenue for the period improved 26.5% Y.o.Y to RM805.5 mln.

• The results came in above our expectations with its revenue amounting to 88.1% of our previous full-year forecast of RM914.7 mln, while its net profit came in at 86.6% of our last estimate of RM92.2 mln.

• Meanwhile, KLR’s 9MFY18 pretax profit rose 57.1% Y.o.Y to RM128.8 mln (pretax margins: 16.0%), on the back of higher contribution from both the plantation and milling segments following the stronger FFB output and higher average selling prices. With the recovery of FFB production post-El-Nino production still in play, KLR’s FFB production added 13.9% Y.o.Y to 77,333 tonnes in 3QFY18, but tapered from 82,494 tonnes recorded in 2QFY18 (see Appendix 1). Nevertheless, its CPO production continue to trend higher, rising 20.4% Y.o.Y to 85,569 tonnes in 3QFY18 and improved 8.9% Q.o.Q from 78,568 tonnes in 2QFY18 (see Appendix 2).

• As of 9MFY18, KLR continues to maintain a lean balance sheet with a cash holding of RM325.3 mln as oppose to a total borrowings of RM27.8 mln. The group has also declared a special single tier dividend of 6.0 sen per share, payable on 7th February 2018. This brings its total dividend to 15.0 sen year-to-date, representing 58.6% payout from its 9MFY18 net profit.

Prospects

As of 30th September 2017, KLR’s total planted area stood at approximately 14,941 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 2,441 ha. (up from 2,421 ha. 2QFY18) of Native Customary Rights (NCR) land have been planted 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. The recovery in CPO prices since June 2017 averaging at RM2,732.59 (+2.9% Q.o.Q) per metric tonne level in 3QFY18 (see Appendix 2), came slightly above our estimates of RM2,700 for FY18. In the meantime, the 11MFY18 average CPO prices comes in at RM2,722.39 per metric tonne. Moving forward, we expect CPO prices to be frail over the next quarter due to: (i) seasonal factors as China and Europe traditionally reduce their import in winter months, (ii) sluggish demand from India after the country has raised its import duty to 30% (from 15%) in November 2017, and (iii) slower production due to labour shortages. Moving forward, Malaysia will lower the CPO export tax to 5.5% in January 2018, from 6.0% in December 2017. The aforementioned move is to reflect the lackluster performance of CPO prices. In the meantime, we also note that KLR was removed from shariah compliant list on 23rd November 2017. As of 31st July 2017, the group’s Cashto-Total Assets ratio stood at 36.9%, exceeded the Shariah screening methodology financial ratio benchmark of maximum 33.0%. In the meantime, KLR has proposed a series of corporate exercise involving: (i) share split on a one-to-three (1-to-3) basis and a bonus issue of up to 46.8 mln free warrants, on the basis of one warrant for every 20 subdivided shares held after the proposed share split. We view the aforementioned corporate exercise positively as part of the group’s effort to improve the trading liquidity of its shares and as a reward to its existing shareholders.

Valuation And Recommendation

With the reported results coming in above our estimates, we raised our net earnings forecast by 8.8% and 12.9% to RM100.2 mln and RM104.1 mln for FY18 and FY19 respectively, accounting for the higher-than-expected average CPO price of RM2,787 in 9MFY18. Consequently, we also upgrade our recommendation to BUY on KLR with a higher target price of RM4.65 (from RM4.15) as we rolled over our valuation metrics to FY19 by ascribing an unchanged target PER of 14.0x to its revised FY19 EPS of 33.4 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x.

At the target price of RM4.65, KLR will trade an implied PER of 14.5x and 13.9x for FY18 and FY19 respectively, which is fair, in our view, given the cyclical nature of the palm oil industry. A re-rating, however, is on the cards if crude palm oil prices were to trade above our estimates of an average of RM2,600 per tonne in FY19.

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 - 26 Dec 2017