Results Review

• Kim Loong’s 1QFY19 net profit fell 15.2% Y.o.Y to RM20.1 mln, dragged down by lower fresh fruit bunches (FFB) production from the plantation segment, coupled with lower average selling prices during the quarter which offset the higher crude palm oil (CPO) production. Revenue for the quarter declined 7.5% Y.o.Y to RM236.5 mln, mainly due to lower FFB average selling prices.

• The results came in below expectations with its net profit only amounting to 19.3% of our previous full-year forecast of RM104.3 mln, while its revenue also came below our forecast, amounting to 21.6% of our previous estimate of RM1.09 bln. The variance is due to the lower average selling prices for both FFB and CPO during the quarter.

• Segment wise, its plantation EBIT sank 46.5% Y.o.Y to RM17.8 mln on lower FFB production in Keningau region, relative to the exceptionally high production in the previous corresponding quarter. The milling operations segment’s EBIT, however, jumped 101.3% Y.o.Y to RM12.6 mln, lifted by better processing margins which offset the lower CPO average selling prices.

• As of 1QFY19, Kim Loong continues to maintain a lean balance sheet with a sizeble war chest (cash holdings of RM300.0 mln as oppose to a total borrowings of RM27.1 mln). No dividends were declared in respect of the quarter under review as the group traditionally rewards shareholders with dividends in the subsequent quarters of the financial year.

Prospects

As of 1QFY19, KLR’s total planted area stood at 14,946 ha. across both Peninsular and East Malaysia. The group also maintains a healthy tree profile (Immature: 3%, Young Mature: 11%, Prime Mature: 29%, Old Mature: 52% and Pre-replanting: 5%) – implying that approximately 80% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

In 1QFY19, KLR’s FFB Production decreased 9.1% Y.o.Y to 80,254 MT (see Appendix 1). Despite that, KLR’s CPO production rose 3.8% Y.o.Y to 71,945 MT, whilst Palm Kernel production climbed 4.8% Y.o.Y to 5,879 MT (see Appendix 2) in 1QFY19. In the meantime, KLR’s CPO extraction rate stood at 21.8% in 1QFY19, continuing to outperform Malaysia’s average CPO extraction rate of 20.0% over the same period (see Appendix 3).

Nevertheless, Kim Loong’s average CPO selling price declined 19.1% Y.o.Y to an average of RM2,418 per MT in 1QFY19, from an average of RM2,990 per MT recorded in 1QFY18. The weakness in the CPO prices came after the upliftment of export duty in May 2018 in view of high stockpiles. Moving forward, we expect CPO prices to remain soft, trading in a range-bound manner between RM2,300-RM2,400 per MT (revised downwards from RM2,400-RM2,500 per MT) in FY19 due to the absence of abnormal weather phenomenon that could disrupt production, coupled with the sluggish demand from China and steep hike in import duty from India.

In the meantime, we note that the Renewable Energy Power Purchase Agreement (REPPA) for the Keningau biogas power plant for supplying power to Sabah Electricity Sdn Bhd has been signed. Construction works, however, have not commenced, awaiting for further approval from regulatory authorities.

Valuation And Recommendation

Despite the weaker-than-expected results, we continue to favour 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.

However, with the reported results coming below our estimates, we trimmed our net profit forecast by 14.4% and 3.4% to RM89.3 mln and RM100.8 mln for FY19 and FY20 respectively to account for the lower FFB and CPO average selling prices. Consequently, we cut our call on KLR to HOLD with a lower target price of RM1.35 (from RM1.55) as valuations are already fair, in our view.

Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY19 EPS of 9.6 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x. At the target price of RM1.35, KLR will trade an implied PER of 14.1x for FY19, which is fair, in our view, given the cyclical nature of the crude palm oil industry.

Source: Mplus Research - 29 Jun 2018