Results Review

• Kim Loong’s 2QFY20 net profit fell 13.3% Y.o.Y to RM10.4 mln, dragged down by the decline in average selling prices (ASP) of fresh fruit bunches (FFB) and crude palm oil (CPO), coupled with approximately one month’s operational disruption at its Kota Tinggi mill. Revenue for the quarter decreased 26.6% Y.o.Y to RM154.3 mln.

• For 1HFY20, cumulative net profit slipped 22.5% Y.o.Y to RM24.9 mln. Revenue for the period contracted 27.6% Y.o.Y to RM323.3 mln. The results came in below expectations with its net profit only amounting to 32.5% of our previous full-year forecast of RM76.7 mln, while its revenue also came below our expectations, amounting to 36.9% of our previous FY20 estimate of RM1.00 bln. The bottom line’s variance is due to the lower CPO average selling prices.

• Segment wise in 2QFY20, its plantation segment EBIT declined 13.3% Y.o.Y to RM5.2 mln on lower ASP of FFB and lower production. The milling operations segment’s EBIT sank 57.8% Y.o.Y to RM3.4 mln, dragged down by the fire incident that caused temporary production disruption at the Kota Tinggi mill.

• Despite the weaker-than-expected earnings, KLR continues to maintain a strong balance sheet, backed by with cash holdings of RM201.7 mln as oppose to a total borrowings of RM16.2 mln in 2QFY20. A single tier dividend of 3.0 sen per share for the quarter, payable on 21st November 2019, was declared.

Prospects

As of 2QFY20, KLR’s total planted area stood at 14,946 ha. (unchanged from 1QFY20) 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 500-ha. replanted as of 2QFY20 – on track to meet its 1,000 ha. of annual replanting scheme until FY23.

In 2QFY20, KLR’s FFB production gained 8.0% Y.o.Y to 65,945 tonnes (see Appendix 1). Despite that, KLR’s CPO production declined 21.9% Y.o.Y to 53,229 tonnes (see Appendix 2) affected by the fire incident at its Kota Tinggi mill – which has been fully restored. Palm Kernel production also fell 22.1% Y.o.Y to 12,264 tonnes as a consequence of the fire. In the meantime, KLR’s CPO extraction rate stood at 21.7% in 1HFY19 – continues to outperform Malaysia’s average CPO extraction rate of 20.4% over the same period (see Appendix 3).

While India expects to shift their CPO purchase to Indonesia after raising their import tax on refined palm oil from Malaysia by 5% to 50% in September 2019, we reckon that the impact on Malaysia’s CPO inventory levels will be minimal, owing to the rising purchase from China following the prolonged Sino-U.S. trade dispute. Hence, we maintain our CPO price assumption of between RM1,900-RM2,100 per tonne in 2019.

Valuation And Recommendation

As the reported earnings came below our expectations, we trimmed our net profit forecast by 19.2% and 3.4% to RM61.5 mln and RM76.8 mln for FY20 and FY21 respectively to account for disruption of Kota Tinggi mill production, coupled with the lower turnover from the slowdown in global demand growth in 1HFY20. Despite that, we maintain our HOLD recommendation on KLR, with an unchanged target price of RM1.15 as we rolled over our valuation metrics to FY21. Our target price is derived by ascribing an unchanged target PER of 14.0x to its revised FY21 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 recent recovery in CPO prices is sustainable, premised to the seasonally higher demand ahead of festive season that could see 2HFY20 results picking up. We also continue to like 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 - 30 Sept 2019