Company Update

• We met up with Kim Loong Resources Bhd’s (KLR) management recently on the progress of the acquisition of Native Customary Rights (NCR) land and the Federal Court had, on 7th November 2017, delivered its Judgement which allowed KLR’s appeal and to set aside the Judgement of the High Court and the Court of Appeal. In view of that, we expect a recovery of RM2.9 mln on impaired assets to materialise in 4QFY18.

• As of 30th November 2017 (3QFY18), KLR continues to maintain a healthy tree age profile (see Appendix 1) that could sustain its earnings over the foreseeable future. The group currently has over 15,000 ha. of oil palm plantations in Sabah, Sarawak and Johor. Moving forward, the group has outlined its continual replanting programme of approximately 1,000 ha. per annum for old palm trees from 2018 to 2026.

• On the milling segment, KLR currently owns three mills at Kota Tinggi, Johor, Telupid and Keningau, Sabah with a combined processing capacity of 1.5 mln tonnes per annum. The group is also at the preliminary planning stage to setup a mill in Sarawak, once the acquisition of remainder of NCR land is completed.

• Moving forward, KLR has also earmarked approximately RM30.0 mln as CAPEX in FY19, mainly for the development of biogas plants. The biogas plants in Kota Tinggi mill, Johor and Keningau mill, Sabah will generate a combined capacity of 3.8MW electricity. Already, KLR has obtained the Feed-in-Tariff (FIT) approvals from the Sustainable Electricity Development Authority (Seda) for sale to Tenaga Nasional Bhd and Sabah Electricity Sdn. Bhd.

We reckon that the government’s move to slash crude palm oil (CPO) export taxes for three months (January 2018-March 2018) is positive over the short term for upstream Malaysian planters as it will help boost exports of the commodity. Nevertheless, the short-term gains could be offset by the European Parliament vote to ban palm oil as biofuels from 2021 in order to prevent deforestation and to meet climate goals. Over the past couple of years, Europe is Malaysia's second-largest export markets for palm oil with 30.0% consumed for biodiesel.

In the meantime, we note that KLR has proposed a series of corporate exercise which entails: (i) share split involving every one existing ordinary share divided into three new KLR shares, and (ii) bonus issue of one free warrant for every twenty subdivided shares held after the proposed share split. We view the aforementioned corporate exercise, expected to be completed by end of 2Q2018, to be slightly positive as it not only improve the liquidity of the group’s shares, but also as a reward to existing shareholders via the issuance of free warrants. Meanwhile, we also expect KLR to return to a Shariahcompliant company on the next update in end-May 2018.

Valuation and Recommendation

We continue to like KLR as one of the most efficient local crude palm oil planter with a superior yield per hectare vs. Malaysia’s average over the past years. We view the recent weakness in CPO prices to be short-lived as demand from China will pick-up in 1Q2018 amid the festive season, while the recent cut in CPO export tax could also boost demand over the near term.

With its 9MFY18 net profit already hitting RM79.8 mln, the company is largely on track to meet the RM100.0 mln mark in FY18. Consequently, we lift our earnings forecast marginally higher by 0.7% and 0.2% to RM100.9 mln and RM104.1 mln for FY18 and FY19 respectively, accounting for the stronger-than-expected production.

We also maintain our BUY recommendation on KLR with an unchanged target price of RM4.65 as we ascribed 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 14.4x and 13.9x for FY18 and FY19 respectively, which is fair, in our view, given the cyclical nature of the crude palm oil industry.

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 - 6 Feb 2018