Results Review

• Kim Loong’s 4QFY19 net profit sank 83.7% Y.o.Y to RM3.1 mln, dragged down by the decline in average selling prices (ASP) of fresh fruit bunches (FFB) that offset the higher production in the plantation segment, coupled with the sharp decline in crude palm oil (CPO) ASP and lower processing margins from the milling segment. Revenue for the quarter declined 26.4% Y.o.Y to RM198.5 mln.

• For FY19, cumulative net profit slipped 46.0% Y.o.Y to RM52.1 mln. Revenue for the year decreased 18.8% Y.o.Y to RM872.9 mln. The results came in below expectations with its net profit only amounting to 78.0% of our full-year forecast of RM66.8 mln, while its revenue came within our forecast, amounting to 97.9% of our FY19 estimate of RM891.8 mln. The bottom line’s variance is due to the lower average selling prices of CPO, particularly in 4QFY19, coupled with the higher effective tax rate at 32.4% vs. our assumption of 23.5%.

• Segment wise in FY19, its plantation segment EBIT contracted 60.1% Y.o.Y to RM43.2 mln on lower ASP of FFB and lower production. The milling operations segment’s EBIT declined 14.8 Y.o.Y to RM43.4 mln, dragged down by lower CPO average selling prices that offset the higher sales quantity.

• Despite the weaker-than-expected earnings, KLR continues to maintain a strong balance sheet, equipped with cash holdings of RM194.7 mln as oppose to a total borrowings of RM19.3 mln. A final dividend of 3.0 sen per share, payable on 29th August 2019, was declared.

Prospects

As of 4QFY19, KLR’s total planted area stood at 14,946 ha. (unchanged from 3QFY19) across both Peninsular and East Malaysia. KLR continues to maintain a healthy tree profile (Immature: 7%, Young Mature: 7%, Prime Mature: 30%, Old Mature: 48% and Prereplanting: 8%), of which approximately 80% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

In 4QFY19, KLR’s FFB production climbed 2.5% Y.o.Y to 94,678 tonnes (see Appendix 1). Similarly, KLR’s CPO production rose marginally by 0.8% Y.o.Y to 89,739 tonnes (see Appendix 2). Palm Kernel production, meanwhile, added 4.5% Y.o.Y to 21,384 tonnes. In the meantime, KLR’s CPO extraction rate stood at 21.4% in FY19 - continues to outperform Malaysia’s average CPO extraction rate of 19.9% over the same period (see Appendix 3). Meanwhile the Keningau biogas power plant has yet to commence operations, pending for the delivery of gas engines.

The European Union’s decision to ban the usage of palm oil as an additive for biofuel - deeming it unsustainability as it is not a green fuel as it causes deforestation, does not bode well for the general palm oil market. The move will see the phasing out of the usage of palm oil starting from 2023 and expected to reach zero usage in 2030. As of 2018, Malaysia exported 1.9 mln tonnes of palm oil to the European Union – representing 12.0% of the total export in 2018, whilst 3.7 mln tonnes of palm oil biodiesel were exported to the European Union last year. Although the effects are not immediate, the E.U.’s impending move could pressure CPO prices for longer.

On the local front, the B10 biodiesel programme for the transportation sector has started on 1st February 2019, whilst the B7 biodiesel programme will be introduced for the industrial sector on 1st July 2019. Both the aforementioned programmes are expected to utilise a total of 761,000 tonnes of palm oil per annum which will see the reduction of the already high stockpiles after a spike in 4Q2018 production.

Valuation And Recommendation

In view of the weaker-than-expected results, we trimmed our net profit forecast by 2.1% and 5.4% to RM83.7 mln and RM86.2 mln for FY20 and FY21 respectively to account for the steeper-than-expected decline in FFB and CPO average selling prices. Despite that, we maintain our HOLD recommendation on KLR, but with a lower target price of RM1.26 (from RM1.28). Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY20 EPS of 9.0 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x.

We continue to favour KLR for its position as one of the most efficient crude palm oil planters with a superior yield per ha. vs. Malaysia’s average over the past few years. We reckon that the recent recovery in CPO prices arising from the decline in Malaysia CPO stockpiles bodes well for KLR and we expect the momentum to persist with CPO prices to average between RM2,200-RM2,250 levels metric tonne in 2019, premised to the seasonally slowdown in production of Malaysia planters in first half of the year that would continue to trim the high stockpiles, coupled with the Malaysian government’s efforts to boost the usage of crude palm oil in the transportation and industrial sector.

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 - 27 Mar 2019