Results Review

• Kim Loong’s 2QFY19 net profit sank 54.3% Y.o.Y to RM12.0 mln, dragged down by lower fresh fruit bunches (FFB) production from the plantation segment, lower average selling prices and decline in crude palm oil (CPO) production. Revenue for the quarter decreased 19.3% Y.o.Y to RM210.3 mln, mainly due to lower FFB average selling prices.

• For 1HFY19, cumulative net profit decreased 35.7% Y.o.Y to RM32.1 mln. Revenue for the period slipped 13.4% Y.o.Y to RM446.8 mln. The results came in below expectations with its net profit only amounting to 35.5% of our previous full-year forecast of RM90.5 mln, while its revenue also came below our forecast, amounting to 46.9% of our FY19 estimate of RM952.1 mln. The variance is its bottom line is mainly due to the lower average selling prices for both FFB and CPO during the period.

• Segment wise, its plantation EBIT slumped 75.1% Y.o.Y to RM6.0 mln in 2QFY19 on lower FFB production in the Keningau region, coupled with lower FFB average selling prices. The milling operations segment’s EBIT dipped 39.8% Y.o.Y to RM8.0 mln, dragged down by lower CPO average selling prices, coupled with lower processing margins.

• As of 2QFY19, Kim Loong continues to maintain a lean balance sheet with a sizeble war chest (cash holdings of RM322.1 mln as oppose to a total borrowings of RM24.3 mln). A dividend of 3.0 sen per share for the quarter, payable on 22nd November 2018, was declared.

Prospects

As of 2QFY19, 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: 4%, Young Mature: 11%, Prime Mature: 29%, Old Mature: 51% 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 2QFY19, however, KLR’s FFB Production sank 26.0% Y.o.Y to 61,063 MT (see Appendix 1), its lowest level since 1QFY17. Similarly, KLR’s CPO production fell 13.2% Y.o.Y to 68,160 MT, whilst Palm Kernel production contracted 11.5% Y.o.Y to 15,753 MT (see Appendix 2). In the meantime, KLR’s CPO extraction rate stood at 21.5% in 1HFY19; continues to outperform Malaysia’s average CPO extraction rate of 19.9% over the same period (see Appendix 3).

Kim Loong’s average CPO selling price declined 15.0% Y.o.Y to an average of RM2,300 per MT in 2QFY19, from an average of RM2,706 per MT recorded in 2QFY18. Moving forward, we expect CPO prices to remain soft, trading in a range-bound manner between RM2,200-RM2,300 per MT in view of the stiff competition from Indonesia, global trade uncertainty, sluggish demand from China and steep hike in import duty from India. Nevertheless, the cut on export tax to zero in September 2018 could lift demand and provide some cushion on the recent weakness on CPO prices.

Valuation And Recommendation

Following the weaker-than-expected results, we trimmed our net profit forecast by 13.0% and 11.4% to RM78.6 mln and RM89.3 mln for FY19 and FY20 respectively to account for the depressed FFB and CPO average selling prices. Despite that, we maintain our HOLD recommendation on KLR with an unchanged target price of RM1.35 as we rolled over our valuation metrics to FY20. Our target price is derived by ascribing an unchanged target PER of 14.0x to its FY20 EPS of 9.5 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x.

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. A rerating is in the cards if CPO prices trend above our assumption of between RM2,200- RM2,300 per MT in FY19 and FY20 respectively.

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 - 28 Sept 2018