Summary

• Kim Loong Resources Bhd’s (KLR) 1QFY21 net profit rose 57.9% YoY to RM22.9m, boosted by the higher average CPO prices at RM2,505 per tonne vs. RM1,997 per tonne recorded in the previous corresponding quarter which offset the lower production. Revenue for the quarter climbed 19.2% YoY to RM201.4m.

• The reported earnings exceeded our expectations, making up to 51.4% of our full year net profit forecast of RM44.5m for FY21, due to the higher CPO prices vs. our assumption of RM2,300. Meanwhile, the reported revenue came slightly above our expectations, amounted to 27.7% of our full year estimate of RM727.8m.

• KLR continues to maintain a healthy tree profile (Immature: 12%, Young Mature: 6%, Prime Mature: 35%, Old Mature: 30% and Pre-replanting: 17%), of which approximately 71% of the group’s palm trees will be able to generate sustainable earnings over the foreseeable future.

• In 1QFY21, KLR’s FFB production fell 8.0% YoY to 71,729 tonnes, while CPO production decreased 6.9% YoY to 66,461 tonnes. In the meantime, KLR’s CPO extraction rate stood at 21.6% in 1QFY21 – continues to outperform Malaysia’s average CPO extraction rate of 19.9% over the same period underlying the group’s efficiency.

• We see inventory level remain stable as demonstrated in 1QFY21. Any weakness in demand will be cushioned by the higher usage from the resumption of B20 and B30 biodiesel programme in Malaysia and Indonesia respectively, while the export tax exemption of crude palm oil, crude palm kernel oil and processed palm kernel oil for the second half of 2020 bodes well to keep price competitive at international level.

• Moving forward, we see demand to pick up, particularly from India and China following their low inventory levels, while the former saw the worst locust swarm in nearly 25 years may force the country to rely heavily on imports of agriculture products. At the same time, the acquisitions of oil palm estates in Sabah are expected to conclude in 3QFY21 will boost the group’s FFB production by 10.0%.

Valuation & Recommendation

• With the reported earnings coming above our forecast, we tweaked our FY21 and FY22 net profit higher by 44.5% and 45.3% to RM60.3m and RM62.7m respectively, accounting for the higher CPO prices. Consequently, we upgrade KLR to HOLD (from Sell) with a higher target price of RM1.16 (from RM0.86). Our target price is derived by ascribing an unchanged target PER of 18.0x to its revised FY21 EPS of 6.4 sen. The ascribed target PER is in line with the industry average that rose to around 16.5x-19.5x.

• 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 Jun 2020