Results Review

• Kim Loong’s 3QFY19 net profit slipped 40.5% Y.o.Y to RM16.3 mln, dragged down by lower fresh fruit bunches (FFB) production from the plantation segment, whilst revenue for the quarter fell 21.3% Y.o.Y to RM227.6 mln. The decline in both the top and bottom line is due to lower FFB production, coupled with lower average selling prices (ASP) of crude palm oil (CPO).

• For 9MFY19, cumulative net profit sank 37.3% Y.o.Y to RM49.0 mln. Revenue for the period decreased 16.3% Y.o.Y to RM674.4 mln. The results came in below expectations with its net profit only amounting to 62.2% of our previous full-year forecast of RM78.7 mln, while its revenue also came below our forecast, amounting to 70.8% of our FY19 estimate of RM952.1 mln. The variance is its bottom line is mainly due to the lower average selling prices of CPO during the period.

• Segment wise in 9MFY18, its plantation segment EBIT sank 58.6% Y.o.Y to RM34.0 mln in 2QFY19 on lower FFB production, coupled with lower FFB average selling prices that slipped 22.7% Y.o.Y to RM446 per tonne. The milling operations segment’s EBIT fell 11.6% Y.o.Y to RM34.9 mln, dragged down by lower CPO average selling prices that decreased 18.3% Y.o.Y to RM2,278 per tonne.

• As of 3QFY19, Kim Loong continues to maintain a lean balance sheet with a sizeble war chest (cash holdings of RM309.8 mln as oppose to a total borrowings of RM21.4 mln). No dividends were declared for the quarter as Kim Loong traditionally declares dividends in the second and fourth quarter of its financial year.

Prospects

As of 3QFY19, KLR’s total planted area stood at 14,946 ha. (unchanged from 2QFY19) across both Peninsular and East Malaysia. The group also maintains a healthy tree profile (Immature: 6%, Young Mature: 11%, Prime Mature: 29%, Old Mature: 51% and Pre-replanting: 3%) – implying that approximately 80% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

In 3QFY19, KLR’s FFB production fell 4.2% Y.o.Y to 74,086 tonnes (see Appendix 1). Likewise, KLR’s CPO production slipped 1.0% Y.o.Y to 86,423 tonnes. Palm Kernel production, however, climbed 5.2% Y.o.Y to 19,535 tonnes (see Appendix 2). In the meantime, KLR’s CPO extraction rate stood at 21.4% in 1HFY19, continuing to outperform Malaysia’s average CPO extraction rate of 20.0% over the same period (see Appendix 3).

In order to curb and potentially reduce the rising CPO inventory level, the Malaysian government recently announced that it would implement a 10.0% palm oil blending rate (the B10 programme) for biodiesel used in the transportation sector and a 7.0% rate for biodiesel in the industrial sector. In the meantime, KLR’s Keningau biogas power plant is expected to be installed in 2019. Upon completion, the group will supply a combined 3.8 MW power generated from its palm oil mills in Kota Tinggi, Johor and Keningau, Sabah.

Valuation And Recommendation

In view of the weaker-than-expected results, we trimmed our net profit forecast by 15.1% and 11.9% to RM66.8 mln and RM79.0 mln for FY19 and FY20 respectively to account for the lower-than-expected FFB and CPO average selling prices. Despite that, we maintain our HOLD recommendation on KLR, but with a lower target price of RM1.15. Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY20 EPS of 8.4 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 crude palm oil planter with a superior yield per ha. vs. Malaysia’s average over the past few years. A re-rating is in the cards if CPO prices trend above our assumption of between RM2,100-RM2,200 per tonne in FY19 and FY20 respectively.

Risks to our recommendation include fluctuations in 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 Dec 2018

Source: Mplus Research - 28 Dec 2018