Results Review

• Kim Loong’s 4QFY18 net profit climbed 16.5% Y.o.Y to RM19.3 mln, lifted by higher production from the plantation segment that offset the lower average selling prices during the quarter, coupled with higher processing margins from the milling segment. Revenue for the quarter added 5.4% Y.o.Y to RM269.8 mln. For FY18, cumulative net profit rose 39.3% Y.o.Y to RM99.1 mln. Revenue for the year expanded 20.5% Y.o.Y to RM1.08 bln.

• The results came in within expectations with its revenue amounting to 95.9% of our full-year forecast of RM1.12 bln, while its net profit came in at 98.7% of our estimate of RM100.4 mln.

• Meanwhile, Kim Loong’s FY18 pretax profit gained 45.7% Y.o.Y to RM162.0 mln (pretax margins: 15.1% vs. 12.5% in FY17), anchored by higher CPO production and firmer CPO prices for the year. Following the recovery from the El-Nino weather, Kim Loong’s FFB production improved 43.5% Y.o.Y to 92,326 tonnes in 4QFY18, rising from 77,333 tonnes recorded in 3QFY18 (see Appendix 1). At the same time, its CPO production also climbed, adding 38.4% Y.o.Y to 88,991 tonnes in 3QFY18 and improved 4.0% Q.o.Q from 85,569 tonnes in 3QFY18 (see Appendix 2).

• As of FY18, Kim Loong continues to maintain a lean balance sheet with a cash holding of RM300.0 mln as oppose to a total borrowings of RM27.1 mln. The group has also declared a final dividend of 9.0 sen per share, payable on 29th August 2018. This brings its total dividend to 24.0 sen, representing 74.5% payout from its FY18 net profit.

Prospects

As of FY18, KLR’s total planted stood at approximately 15,000 ha. across both Peninsular and East Malaysia. The group also maintains a healthy tree profile (Immature: 5%, Young Mature: 9%, Prime Mature: 28%, Old Mature: 52% and Prereplanting: 6%) – implying that approximately 80% of the group’s production will be able to generate sustainable earnings over the foreseeable future. In order to maintain a healthy tree age profile, KLR has outlined a continual replanting programme for 1,000 ha. of old mature trees per annum from 2018 to 2026. In the meantime, KLR’s

CPO extraction rate stood at 21.3% in FY18, continuing to outperform Malaysia’s average CPO extraction rate of 19.7% in the same period (see Appendix 3). CPO prices traded in a sluggish manner, falling from the peak of RM2,855 per metric tonne to RM2,417 per metric tonne in 4QFY18 and consequently averaging at RM2,586.05 per metric tonne (-5.4% Q.o.Q). Nevertheless, CPO prices averaging at RM2,657.38 per metric tonne in FY18 came in line with our estimates at RM2,600- RM2,700 per metric tonne. Going forward, we expect average CPO prices to consolidate slightly, hovering at an average between RM2,500-RM2,600 in FY19.

The expected price weakness is due to the slowdown in demand from India following the import duty hike that offsets Malaysia’s move in slashing the CPO export tax to 5.5% in January 2018, from 6.0% in December 2017. Following the potential decline in exports, the piling up of Malaysian CPO inventories will consequently prove to be a stumbling block for CPO prices to climb above the RM2,600 per metric tonne level, in our opinion.

Meanwhile, Kim Loong’s proposed corporate exercise that entails: (i) share split on a 1- to-3 basis, and (ii) 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 will be completed on 5th April 2018. Already, shareholders have voted in favour for the abovementioned proposed exercise in the latest extraordinary general meeting held in mid-March 2018.

Valuation And Recommendation

We continue to like KLR as it is among the most efficient local crude palm oil planter with a superior yield per hectare vs. Malaysia’s average over the past few years. With the reported results coming within our estimates, we also leave our earnings forecast unchanged and we maintain our BUY recommendation on KLR with an unchanged target price of RM4.65.

Our target price is derived by ascribing an unchanged target PER of 14.0x to its 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 13.9x and 14.0x for FY19 and FY20 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 subject to weather conditions, demand (mainly from both China and India) and supply (from both Malaysia and Indonesia). The supply of soybeans could also 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 Mar 2018