Results Review

• Kim Loong’s 1QFY20 net profit slipped 27.9% Y.o.Y to RM14.5 mln, dragged down by the decline in average selling prices (ASP) of fresh fruit bunches (FFB), coupled with the sharp decline in crude palm oil (CPO) ASP during the quarter. Revenue for the quarter declined 28.6% Y.o.Y to RM169.0 mln.

• The results came in below expectations with its net profit only amounting to 17.3% of our previous full-year forecast of RM83.8 mln, while its revenue also came below our expectations, amounting to 16.9% of our most recent FY20 estimate of RM1.00 bln. The bottom line’s variance is due to the lower CPO average selling prices.

• Segment wise in 1QFY20, its plantation segment EBIT dipped 55.8% Y.o.Y to RM7.9 mln on lower ASP of FFB and lower production. The milling operations segment’s EBIT, however, rose 9.0% Y.o.Y to RM13.8 mln, boosted by the better processing margin from the Kota Tinggi mill.

• Despite the weaker-than-expected earnings, KLR continues to maintain a strong balance sheet, backed by with cash holdings of RM203.2 mln as oppose to a total borrowings of RM18.0 mln in 1QFY20. No dividends were declared as KLR traditionally declares dividends in the subsequent quarters of the financial year end.

Prospects

As of 1QFY20, KLR’s total planted area stood at 14,946 ha. (unchanged from 4QFY19) across both Peninsular and East Malaysia. KLR continues to maintain a healthy tree profile (Immature: 8%, Young Mature: 7%, Prime Mature: 30%, Old Mature: 47% 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 the meantime, KLR has carried out its continuous replanting program with approximately 200-ha. replanted as of 1QFY20.

In 1QFY20, KLR’s FFB production fell 2.8% Y.o.Y to 77,968 tonnes (see Appendix 1). Likewise, KLR’s CPO production declined 0.8% Y.o.Y to 71,378 tonnes (see Appendix 2) as Malaysia struggle to pare down the record high stockpile level. Palm Kernel production, however, added 9.5% Y.o.Y to 17,933 tonnes. In the meantime, KLR’s CPO extraction rate stood at 21.8% in FY19 – continues to outperform Malaysia’s average CPO extraction rate of 20.1% over the same period (see Appendix 3).

In order to tackle the sluggish global demand for palm oil, Indonesia has carried out the testing of biodiesel B30 content in automobiles. Should the aforementioned move be enforced, it will bump consumption of bio-content made from palm oil to as much as 9.0 mln kilolitres (KL) per year, up from an estimated 6.2 mln KL in 2019.

Following the implementation of the B10 biodiesel programme earlier this year, the Malaysian government has formed a special joint committee headed by the Ministry of Primary Industries to monitor and ensure that the implementation of B20 biodiesel fuel to proceed smoothly next year. The move bodes well for the palm oil industry to ease the swelling stockpile level. Following the prolonged U.S.-China trade dispute that resulted in the stagnating demand, we revised downwards our CPO price assumption to between RM1,900-RM2,100 (from RM1,950-RM2,150) per tonne in 2019.

Valuation And Recommendation

In view of the weaker-than-expected results, we trimmed our net profit forecast by 8.4% and 7.8% to RM76.8 mln and RM79.5 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 RM1.15 (from RM1.26). Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY20 EPS of 8.2 sen. The ascribed target PER is in line with the industry average of around 13.5x-15.5x.

We reckon that the weakness in CPO prices will persist, averaging between RM1,900- RM2,100 levels metric tonne in 2019, premised to the sluggish global demand that resulted in the swelling stockpile level. Nevertheless, 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.

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 Jun 2019