Company Update

• Kim Loong Resources Bhd (KLR) is buying four plots of oil palm plantation land in Sabah for RM92.5 mln to increase its land bank and long-term profitability growth. The parcels, with a combined size of 2,722.3-ha, are located near its estates in Sandakan, so the acquisitions are expected to bring about synergistic effects and benefits in terms of cost efficiency of managing the plots.

• We also think that the purchase price tag is fair as it translates to approximately RM0.32 psf, premised to the sizable combined four parcels of land. The aforementioned acquisition will boost KLR’s total plantation land holdings to 18,548ha (from 15,862-ha). Already, KLR is utilising approximately 97% of its’ existing landbank. Out of the total planted area, approximately 74% are prime and old mature, 10% are young mature, 9% are at immature stage, while the remaining 7% are at re-planting stage.

• At the same time, the acquisition will increase the supply of fresh fruit bunches (FFB) produce to the KLR’s palm oil mill at Telupid, Sabah optimising the utilisation of the mill’s processing capacity and will reduce dependence on FFB supply from third parties, particularly during a seasonal low production period.

Post-acquisition, KLR’s tree age profile would be; 73.8% are prime and old mature, 11.1% are young mature, 8.5% are at immature stage, while the remaining 6.5% are at re-planting stage.

Over the years, the combined four parcel of land as delivered a 3-year CARG of 21.1% of FFB production to 29,680.4 MT in 2019. The latest figure also represents 10.7% of KLR’s FFB production of 277558 MT during the period.

Valuation and Recommendation

We continue to like KLR as one of the most efficient crude palm oil planter with a superior yield per ha. vs. Malaysia’s average over the past few years. We believe that the recent pullback in CPO prices to be stabilise, ranging between RM2,500-RM2,700 per tonne in 1H2020 as the potentially rising demand in both Malaysia and Indonesia will absorb any recovery in production to maintain a stable stockpile level.

Following the consolidation of four parcel of land, we tweak our earnings forecast higher by 5.6% to RM69.1 mln for FY21. In view of the recent weakness on the share price, we upgraded KLR to BUY (from Hold) with an unchanged target price of RM1.40. Our target price is derived by ascribing a lower target PER (in view of the unsustainable high CPO prices) of 19.0x (previously pegged at 20.0x) to its FY21 EPS of 7.4 sen. The ascribed target PER is in line with the industry average that rose to around 18.0x-21.0x.

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 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 - 20 Feb 2020